Order of Pension Commutation

Order of Pension Commutation

In our last newsletter we announced the release of our documentation tool which satisfies the requirements of PCG 2017/5. Where the member has multiple pensions, the completion of this document involves the selection of the order in which pensions are to be commuted. The selection will involve the following considerations.

Firstly, which pensions, if any, are grandfathered for deeming purposes and does it matter. The Seniors Health Card is not asset tested so your clients with balances large enough to warrant completion of this documentation may be in receipt of this benefit. Pensions commenced before 1 January 2015 may not yet be deemed. They will be so if commuted back to accumulation and the resultant income test change may cause a loss of this benefit. This may be irrelevant, of course, if the presence of the new accumulation interest will cause the loss in any case but, to be safe, it is prudent to investigate the numbers. The next issue is the preservation of the tax exempt component.

For younger members, whose minimum pension may be less than the earning rate of their fund, it makes sense to commute the pensions with the highest taxable component first. This is because the tax exempt component will grow, in dollar value, in the pension interest. For older members, forced to draw a greater minimum than the fund can realistically earn, the opposite is true. In this case the dollar value of the tax exempt component in a pension will reduce over time whilst the dollar value of the tax exempt component in the accumulation phase will not.