Pension Changes Simplified

9 Nov 2021

Written by

David Busoli, Principal

There have been so many words devoted to the recent pension changes, and those just introduced to parliament, that you could be forgiven for not understanding what has already happened and what will happen if the Bill becomes law.

If a fund has only account based pensions for the full year it will not require an actuarial certificate. This sensible measure is already law for the current 2021/2022 financial year.

The Bill, if passed, will also apply from 1 July 2021. It covers a fund that has had periods where both accumulation and pension accounts have existed during the year – but not at the same time. In this case, trustees will be able to choose how their exempt pension income is calculated as follows;

1. An actuary can calculate the tax exempt portion based on the combination of both account types and this percentage will be applied to the fund’s income for the year or

2. All income that was received (including taxable capital gains) during the period of time that the fund was fully in pension will be tax exempt whilst that received when the fund was fully in accumulation will not. (Note that this option is not available to funds that have disregarded small fund assets)

Let’s look at an overly simplistic example of a fund that has only one investment transaction for the year – the sale of a property. The fund is fully in accumulation for the first half of the year and fully in pension after that.

Under option 1 – 50% of the income would be tax exempt.

Under option 2 – either 100% of the income would be taxable or 100% would be tax exempt depending on whether the sale occurred in the first or second half of the year..

Where the choice is available, it seems it can be made when the returns are being prepared.

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