Social security treatment of complying pension transfers


Thursday 01 February 2018

What is a complying pension?

Complying pensions were generally available prior to 20 September 2007 and attracted social security and benefits tax (reasonable benefit limit) concessions. Super law imposes payment restrictions on complying pensions, including on commutations, except where the commuted amount is transferred to a new complying income stream.

Complying pensions that commenced prior to 20 September 2007 are either fully or partially exempt under the social security assets test depending on whether they commenced before or after 20 September 2004. While generally new pensions commenced from 20 September 2007 are fully assessed, grandfathering of the exemption or relief from penalties may apply in certain circumstances where a complying pension is commuted and transferred to a new complying pension.


Why might a client commute and transfer a complying pension?

A client may wish to commute and transfer their pension for a range of reasons including:

  • they wish to change to a new provider, or
  • in the case where a self managed superannuation fund (SMSF) is paying the pension:
    • the client may no longer want the responsibilities of administering the pension or running the SMSF, or
    • the investments supporting the pension may have performed poorly and the pension no longer passes the high probability test for social security purposes1.

Grandfathering of assets test exemption and/or relief

The table below outlines the social security relief that may be available in circumstances where a complying pension is commuted in full, including any reserves supporting the pension, and transferred to a new pension.2 We are focusing on situations where the original pension is paid from a super fund (as opposed to a life office).

In addition to the specific conditions outlined in the table, there are some primary conditions that must be met in order for any grandfathering of the full or partial assets test exemption to apply.

Primary conditions for grandfathering

In the case of a 100 per cent assets test exempt (ATE) complying pension, the following primary conditions must be met:

  • the original pension must be a lifetime or life expectancy based pension commenced prior to 20 September 2004 and qualify for a 100 per cent assets test exemption, and
  • the pension must be commuted in full to purchase a new lifetime or life expectancy income stream (typically only available from a life office).

In the case of a 50 per cent ATE complying pension, the following primary conditions must be met:

  • the original pension must be a lifetime pension, a life expectancy pension or a market linked income stream commenced between 20 September 2004 and 19 September 2007 (inclusive) and qualify for a 50 per cent assets test exemption, and
  • the pension must be commuted in full to purchase a new lifetime pension, a life expectancy pension or a market linked pension.

Table: Complying pension transfers – summary of social security concessions

The following information assumes that the primary conditions for grandfathering (outlined above) are met in addition to the requirements in the table.

New pension type
Original pension type (below)Market Linked pension within SMSFMarket linked pension with retail providerLifetime or life expectancy complying annuity purchased from life company
Market linked pension within SMSF

50% ATE grandfathered3

50% ATE grandfathered3

50% ATE grandfathered if:

  • SMSF is wound up due to age, incapacity or death
  • Original pension is commuted and transferred to remove a reversionary beneficiary who has died or is no longer in a couple relationship with the primary beneficiary,4 or
  • Original pension is commuted and transferred to alter terms of pension to comply with the restrictions on eligibility to receive a death benefit pension under superannuation law5
Market linked pension with retail provider

50% ATE grandfathered3

50% ATE grandfathered3

50% ATE grandfathered if:

  • Original pension is commuted and transferred to remove a reversionary beneficiary who has died or is no longer in a couple relationship with the primary beneficiary, 4 or
  • Original pension is commuted and transferred to alter terms of pension to comply with the restrictions on eligibility to receive a death benefit pension under superannuation law5
SMSF lifetime or life expectancy complying pension 100% ATE – fails high probability test1
  • Original pension will lose ATE retrospectively
  • Up to 5 years of past social security overpayments can be clawed back as debt due to Commonwealth
  • But no debt raised if transfer occurs within 12 weeks from date of actuarial certificate6
  • New pension is fully assets tested
  • Original pension will lose ATE retrospectively
  • Up to 5 years of past social security overpayments can be clawed back as debt due to Commonwealth
  • But no debt raised if transfer occurs within 12 weeks from date of actuarial certificate6
  • New pension is fully assets tested
  • 100% ATE grandfathered if transfer occurs within 12 weeks from date of actuarial certificate6
SMSF lifetime or life expectancy complying pension 50% ATE – fails high probability test1
  • 50% ATE is grandfathered if transfer occurs within 12 weeks from date of actuarial certificate6
  • 50% ATE is grandfathered if transfer occurs within 12 weeks from date of actuarial certificate6
  • 50% ATE is grandfathered if transfer occurs within 12 weeks from date of actuarial certificate6
SMSF lifetime or life expectancy 100% ATE – meets high probability test1
  • Original pension will lose ATE retrospectively
  • New pension is fully assets tested
  • No debt raised in respect of past social security entitlements
  • Original pension will lose ATE retrospectively
  • New pension is fully assets tested
  • No debt raised in respect of past social security entitlements

100% ATE is grandfathered if:

  • SMSF is wound up due to age/incapacity/death
  • Original pension is commuted and transferred to remove a reversionary beneficiary who has died or is no longer in a couple relationship with the primary beneficiary,4 or
  • Original pension is commuted and transferred to alter terms of pension to comply with the restrictions on eligibility to receive a death benefit pension under superannuation law5
SMSF lifetime or life expectancy complying pension 50% ATE – meets high probability test1
  • Original pension will lose ATE retrospectively
  • New pension is fully assets tested
  • No debt raised in respect of past social security entitlements
  • 50% ATE is grandfathered if SMSF is wound up due to age/incapacity/death

50% ATE is grandfathered if:

  • SMSF is wound up due to age/incapacity/death
  • Original pension is commuted and transferred to remove a reversionary beneficiary who has died or is no longer in a couple relationship with the primary beneficiary,4 or
  • Original pension is commuted and transferred to alter terms of pension to comply with the restrictions on eligibility to receive a death benefit pension under superannuation law5

Other social security considerations

To the extent a client is impacted by the social security income test, the amount of assessed income from a new complying pension is likely to be different from the previous pension. See Macquarie’s Big Black Book for more information about how superannuation income streams are assessed under the social security income test.


Tax considerations

Transfer balance cap

From 1 July 2017, a limit (called the transfer balance cap) applies to the amount of an individual’s accumulated superannuation that can be transferred into a retirement phase pension account over the course of an individual’s lifetime. Penalties may apply if this limit is exceeded.

Special rules apply for calculating the amount (called the special value) of a complying pension that counts towards an individual’s transfer balance cap. These rules apply to lifetime pensions commenced at any time, and life expectancy or market linked pensions that were in place on 30 June 2017 and continue to be paid from 1 July 2017.

Commuting a complying pension and transferring to a new pension may impact on the amount that is counted towards an individual’s transfer balance cap. For more information, see the ATO’s LCR 2016/10 and LCR 2017/1.

Use of reserves

There may be tax consequences in commuting and transferring a complying pension in situations where the pension is supported by reserves (which will typically be the case if the pension is a lifetime or life expectancy pension). This is because allocations from a reserve are counted towards a member’s concessional contributions cap, subject to certain exemptions. The ATO takes quite a broad view of the meaning of ‘reserve’ for this purpose (see ATO ID 2015/21).

In ATO ID 2015/22, the ATO considered that all the funds supporting a lifetime pension formed a reserve and that applying the funds on commutation was an allocation from a reserve. In the case of an allocation from a reserve on commutation and transfer of an income stream, the allocation may be exempt if:

  • the allocation is from of a reserve held solely for the purposes supporting an income stream, and
  • on commutation the allocation is applied to commence another income stream as soon as practicable

The ATO’s view is that if the new income stream is not another complying income stream, this exemption will not apply (see ATO ID 2015/22) and the allocation will count towards the concessional contribution cap. Depending on the amount, there could be significant excess contributions implications for the member.


Useful information

Social Security (Retention of exemption for asset-test exempt income streams) (FaHCSIA) Principles 2011

Australian Government’s Guide to Social Security law: 4.9.4.40 Actuarial Valuation Certificate for Lifetime or Life Expectancy ATE Income Streams Paid from SMSFs or SAFs

ATO Interpretative Decision ATO ID 2015/21 Excess Contributions Tax: concessional contributions – reserves

ATO Interpretative Decision ATO ID 2015/22 Excess contributions tax: concessional contributions – allocation from 'pension reserve account' supporting 'complying lifetime pension'

ATO Law Companion Ruling LCR 2016/10 Superannuation reform: capped defined benefit income streams – non commutable, lifetime pensions and lifetime annuities

ATO Law Companion Ruling LCR 2017/1 Superannuation reform: capped defined benefit income streams – pensions or annuities paid from non-commutable, life expectancy or market-linked products

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1 The high probability test requires an SMSF trustee to obtain an actuary’s certificate for each income year stating that there is a high probability that the SMSF can meet the payment obligations of the pension.

2 Social security legislation provides relief in certain circumstances involving a partial commutation, for example, if there is a family law split or payment of a superannuation surcharge liability. See the Guide to Social Security Law for more detailed information.

3 Subject to all assets supporting the original income stream being rolled over to commence new income stream. Note that Centrelink does not apply this treatment in the case of a transfer to commence a new TAP for a beneficiary following the death of a member.

4 This concession is only available if the payments from the original pension were calculated based on the life expectancy of the reversionary beneficiary.

5 SIS Regulation 6.21(2A) restricts eligibility to receive super death benefits in the form of a pension to a dependant (as defined in super law) other than a child or a child who is:

  • less than 18 years old
  • aged 18 to 24 (inclusive) and financially dependent on the member, or
  • suffering from a qualifying disability.

6 An actuarial certificate that does not state a high probability must be given within 26 weeks of the expiry of the previous year’s certificate. The transfer must occur within 12 weeks following the date of the new certificate.

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The information provided is not personal advice. It does not take into account the investment objectives, financial situation or needs of any particular investor and should not be relied upon as advice. Any examples are illustrations only and any similarities to any readers’ circumstances are purely coincidental.

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