Pension proposal a win for retirees
Top marks to the Tax Institute for its comprehensive and insightful submission to Treasury and the ATO on ways to address the complexities and rigidity of legacy complying superannuation pensions. This is a rare case where the suggested changes would help many now older retirees while at the same time simplify life for the ATO and increase government revenue.
The legacy complying pensions were started in most cases before the superannuation Reasonable Benefit Limits were abolished in 2007 or to take advantage of special age pension assets test exemptions which also ceased in that year. To gain access to the special benefits on offer, retirees were forced to lock up their superannuation assets untouchable until death or for a specified lengthy period (term allocated pensions) to generate an annual income stream.
The passage of time and the 2017 super changes setting a $1.6-million cap on tax-free pension accounts have dramatically changed the need for complying pension accounts. From the government’s perspective, exempting these pensions from the $1.6-million pension cap allows a relatively small number of retirees to retain much larger amounts in tax-free complying pension accounts.
Providing these retirees with the option to switch their current pensions into a standard account based pension would allow them to be subject to the $1.6-million pension cap with their remaining account balances deposited in a superannuation account or in personal names. This change, though not suggested by the Tax Institute could set a time limit on the continued operation of complying pension structures.
There are special complex difficulties, especially for lifetime complying pensions which use investment reserves to help smooth out annual payments. Allowing these reserves which boost the amount invested in tax free accounts to be cashed out at no penalty would also encourage retirees to transfer their benefits to standard accounts.
The Taxation Institute expressed concern that retirees who in general now have smaller complying pension balances taken out to avoid or reduce the impact of the age pension assets test will not want to change their current situation. Forcing retirees to retain products set up when the superannuation and tax laws were completely different is hard to justify, especially when it doesn’t hurt and may improve the federal budget.