Converting super into retirement income: What are your options? 

Q: I know that you can easily combine multiple super funds that are in accumulation mode, but can you do it for accounts that are in pension mode? For example, if you have (or planning to have) more than one UniSuper Flexi Pensions, in your name, providing separate pension income streams, can you at some point in time combine them all into one primary Flexi Pension in order to save on account fees? If so, what would be the necessary procedure required to achieve this outcome?

A: Let me take you through the key fundamentals here, and in particular because you’ve referred to a particular product, I’ve just got to be careful with how I reply to you around that. I, of course, can’t give you specific product advice, but I can give you enough factual information for you to then work out what needs to be done.

Number one, you are 100% correct. You can only ever have one accumulation account in each super fund. Now, you could have more than one super fund creating the ability to hold multiple accumulation accounts. An example, I have a self-managed super fund and I also have an industry fund. I hold my insurance benefits through my industry fund because I find it more cost-effective to do that. I’ve got two funds. My SMSF has an accumulation account and my industry fund has an accumulation account. But the restriction I’m looking at here is you can only ever have one accumulation account per fund. You can, again, as you’ve mentioned, have multiple pension accounts or multiple pension interests in the same super fund, which is what you’ve ended up here, and you now want to combine them.

Now, in most all cases, in fact, in almost every case, you can’t add further capital or further amounts to an existing pension. If you’ve got Pension One with $1 million dollars and Pension Two with $1 million dollars, if you put the $1 million from Pension 2 into Pension 1, you’ve added to the value of it. You’ve added to the capital value of that pension, which you’re not allowed to do. What would usually be required is for you to cease those different pension accounts. You would take that money essentially back to accumulation phase, and then you’d start a new larger pension with the combined balances or part thereof of those combined balances.

Now, in your particular case, because it’s UniSuper, they may have their own specific requirements. They may have their own specific processes that need to be used. I would suggest contacting them and seeing how they can assist you personally with that and what mechanisms or processes could be used to achieve the desired outcome you’re looking for around combining those accounts.

What’s interesting is that I jumped on the UniSuper website and it says that once you start a Flexi pension, you can’t add money to it. If you want to transfer extra funds to your super, do that before you apply. That’s word for word from the UniSuper website. Again, to me, it suggests the same process I mentioned before about stopping or commuting the existing pensions, going back to accumulation, and then recommencing a new pension.

Now, let me add, if I can, some further comments here which are relevant to you here around, I suppose, the particular question that you have, but also relevant for all types of funds, including self-managed funds. If you’re considering combining multiple pension accounts, you would need to stop them and take those benefits back to accumulation phase. What the result of that is, is you’ll have one accumulation account. So all the taxable components of all those different pensions get mixed together. All the tax-free components get mixed together. So you then only have that one accumulation account with taxable and tax-free components. Now, it might have been over the years that you’ve put in place estate planning or tax planning to keep those tax components separate for tax planning purposes or estate planning purposes. If you combine the pensions, that could unwind all those years of work, again, because you can only ever have that one accumulation account. When you roll those pensions back, they do get blended.

Second of all, make sure that you pay at least the minimum pro-rated pension before you stop any of them. Then once you recommence the new pension, make sure you pay the minimum on that pension. Otherwise, you’ll miss out on the tax exemption on the earnings. Let’s just say that you have three pensions and today, 14th of December, I decided to stop them. Make sure that the pro-rata payments from 1 July 2023 to today, the 14th of December, you pay each of those pensions before stopping them. Otherwise, the fund won’t get those tax-free earnings because you didn’t pay the minimum pension.

When you then recommenced your new one larger pension today on the 14th of December, make sure that you pay your pro-rate minimum before 30th June next year. Again, just to ensure you get your tax-free earnings.

The final point on this one is that if you cease those existing pensions, whether it be UniSuper, whether it be an SMSF or whatever, and then you start a new pension, think about your estate planning outcomes. Do you now need to put a new reversionary nomination on that pension? Do you now need to put a new death benefit nomination on any of your accounts? Because you have now changed those accounts that exist in the fund. Look, probably not doable unless you do the commutation, the ceasing back to accumulation and then recommencing. But I do highly recommend you contact UniSuper and ask them what their processes are that may be required.

Q: Thank you for the informative article. My spouse and I have an SMSF, which started in 2007 and which has multiple pension funds in both names. I do the accounting (that was my area prior to retirement) and have been meaning to combine the pensions to one each, every year but the technicalities are seemingly intricate and fraught with danger as mentioned by a former colleague who wasn’t able to provide the actual technical details.

Apparently grandfathering of the older accounts may mean that one shouldn’t fold these into a new pension account (after converting them all back to accumulation phase of course). Is this to preserve the taxable/non – taxable ratio?

Additionally, how does one meet the TBAR reporting requirements for this event when one would do the actions at a date in the past yet one has to meet the meet the TBAR date requirement date for a quarter which is in the past? When rolling forward to a new year to begin processing one has to have completed the prior year, this is usually well past the quarter in which the reportable event happens.

Please note that our response below is general in nature and doesn’t take into account your personal situation.

Firstly, let us address your question about pre-2015 pensions. These pensions are assessed differently in Centrelink means tests for the Commonwealth Seniors Health Card and Age Pension.

If you held a Commonwealth Seniors Health Card immediately prior to 1 January 2015 and have held it continuously since then, any pre-2015 account-based pension is not counted in the income test that determines your eligibility for the card. If you cease a pre-2015 pension, the balance will instead attract deemed interest for the purposes of the income test. This could mean the loss of the card, depending on your overall circumstances.

Similarly, if you were receiving an Age Pension at that time and continuously since that date, income from a pre-2015 account-based pension is calculated based on your actual income payments less a deductible amount for the purposes of Age Pension income testing. If you cease a pre-2015 account-based pension and retain the funds in accumulation or commence a new pension, the balance of the account will instead attract deemed interest that is counted in the income test. This could either improve, reduce, or have no effect on your Age Pension depending on your overall circumstances.

As you mention, when you cease your existing pensions and return these to the accumulation phase, it will result in all of the existing tax components being blended together in your accumulation account, something that can never be unwound. Any prior estate planning or tax planning strategies that you have implemented by keeping your taxable and tax-free components separate would be undone and could never be reinstated moving forward (on these existing benefits). 

Depending on your own personal position and the circumstances of your “death benefit beneficiaries”, merging these tax components and losing the ability to deal with them separately, can have a significantly negative tax effect as I am sure you would be aware due to your accounting background. Hence the need to decide, based on your own position, what is best for you: (1) ease of fund administration by running fewer pension accounts; or (2) the tax benefits that may be relevant from keeping the tax components separate.

In relation to the process of commuting pensions, combining balances, and commencing new pensions, this is not a transaction that would be done at a date in the past. A written request is required to commute pensions back to accumulation phase and the commutation takes place after that request. The TBAR report is then made at the end of the quarter that the commutation (or multiple commutations) took place. Any new pension commenced should also be included in the TBAR report. So essentially, the ceasing (commutation) of the existing pensions AND the recommencement of the new pensions would/could be carried out at the same time and then reported within the same TBAR report. 

For the purposes of TBAR reporting, the market value of the pension must be known at the time of the commutation and the time of commencement of a new pension. Note that the ATO requirement around valuations when a pension starts is as follows: “The valuation should be based on objective and supportable data. In some circumstances a reasonable estimate may need to be made”. If you track your existing superannuation pension balances then you would know what the balances are. 

The ATO provides the following guidance about valuing assets for the purpose of inclusion in the TBAR report and other purposes.