Do I want to do that?
The negative returns posted by many investment products over the past year have come as an unpleasant surprise for investors. But this is particularly true for investors in products such as allocated pensions who, in addition to suffering losses, are also seeing their account balance eroded by the withdrawal of pension payments. That double whammy is leading some to ask how they will ever manage to recoup their losses.
If you're not relying on the income from the pension, says Michael Hutton, a superannuation partner with HLB Mann Judd, you could turn the pension "off" for a while to stop taking your income until your account balance looks a bit healthier.
Can I do that?
It's often thought you can't and it's true, says Hutton, that you have to withdraw a minimum amount each year once you've taken out an allocated pension. However, he says, if you elect to cash in your remaining account balance, and withdraw the money as an eligible termination payment, you can roll the money back into a super fund where it can hopefully recover some of its value. In some cases, you could even roll the money back into the same super fund that is paying the allocated pension (if it does both).
There are a couple of qualifications, however. First, you have to be eligible to accumulate super, which means you must be under 65 or gainfully employed for at least 10 hours a week. Second, you need to get expert advice to ensure you're not disadvantaged by the reasonable benefit limit (RBL) or tax rules.
What does that mean?
Hutton says the Tax Office has issued an interpretation of the rules, which says when you restart your allocated pension it will be measured against your RBL. Effectively, that could mean your original super benefit is counted twice and you could be deemed to have "excess benefits", which don't attract the tax concessions that normally apply to super payouts.
The Tax Office (and the Financial Services Minister, Senator Helen Coonan) has said this double counting will be stopped but no legislation has been passed yet.
Hutton says it pays to be cautious until we see the legislation. For some investors, it won't matter even if their benefit is double counted as they will still fall under the RBL of $562,195.
He says you should also be able to avoid being double counted by rolling over your money into a new super fund, rather than the one you're with now. In this case, he says, the pension-paying fund can notify the Tax Office that a previous benefit has been reversed.
On the tax front, Hutton says investors who have a high tax-free component in their allocated pension should also be careful as this component may be recalculated when they "turn the pension back on". If you have been drawing down pension payments for some time, it may be that you have used up much of the tax-free component and could lose the ongoing benefits of your tax-free income if you cash in your current pension.
"A lot of retirees started allocated pensions before [the rules changed in] 1994 when their super relating to pre-1983 service was part of the undeducted purchase price," he says. "If they roll over into a new fund and start an allocated pension from that fund, they may end up with less tax-free income because they have already taken so much of the tax-free amount."
Hutton says investors thinking of turning off their allocated pensions should seek advice on these implications before deciding whether it is worthwhile.
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