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Certificates
Complying pensions
Description | FAQ's | Fees | Back to Certificates
Description
Background
|In order to take advantage of more generous pension Reasonable Benefit Limits, retirees must draw at least half of their superannuation benefits in the form of complying pensions. For the purposes of testing whether half of benefits are drawn from lifetime pensions, those pensions are valued using factors published in the legislation. These factors often substantially understate the true cost of pensions. This results in a pension sufficient to be deemed to cost half of available benefits costing substantially more.
Funds paying lifetime and fixed term pensions are required to have annual actuarial certificates. These certificates must show whether there is a high (70%) probability of their being sufficient. These certificates can be used to "segregate" assets into those supporting "current pension liabilities" If assets are not segregated, an annual actuarial certificate is needed to determine the proportion of income that applies to current pension liabilities. This portion is tax free.In addition, the practice can supply certificates prior to pension commencement. For large pension funds, one normally expects a proportion of members to die each year. In small funds, death is "binary" - the member either dies or does not. To allow for this, the practice normally recommends initial pension levels such that if investment and inflation assumptions are realised and no death occurs in the first three years, the 70% certainty will not be breached at the end of those three years.
Information needs
The information that the practice usually needs to do any work for self managed superannuation funds depends on the segregation or otherwise of the fund’s assets and the nature of the pensions provided. It includes:
Segregated assets Unsegregated assets or first year Lifetime Fixed term Trust Deed (a) y y y y Draft accounts (b) y y Journals (contributions and benefits) n y Dates of birth y n Valuation date pension $ per annum y y Reversionary proportion y n Indexation rate y y Next indexation date y y Fixed or guaranteed term ends y y Pension creation minutes y y Investment Policy y y Previous actuarial reports (c) (c)
(a) In the case of second or subsequent assignments, a statement to the effect that there has been no change in the trust deed is sufficient.
(b) Year end or commencement of pension.
(c) Last annual or triennial certificate and (for first review) reports dealing with the creation of pensions.Timing
Certificates are normally produced within five business days of receipt of all information. Urgent tasks will be completed within two business days and attract a 15% surcharge.
FAQ's
If your question is not dealt with below please refer to our FAQ page.
Our FAQ page also shows the date at which the information was last checked.
Q1:
High probability not applicable - Still sufficient - Tax consequences…What are the tax consequences of the actuary not being able to certify a high probability of sufficiency but still being able to certify sufficiency?
There are none, as long as the fund is sufficient to meet its liabilities, the fund is solvent and the ATO has no issues with it.
Q2:
High probability not applicable - Still sufficient - Social Security consequences…What are the Social Security consequences of the actuary not being able to certify a high probability of sufficiency but still being able to certify sufficiency?
Action to ensure a high probability is necessary. This normally takes the form of a reduction in pension. This is normally achieved by commutation of the initial pension and establishment of a new pension. This process has consequences under the deprivation provisions of the legislation. The difference between the "high probability" cost of the pension and its Social Security valuation is deemed to have been a gift for these provisions.
Q3:
High probability of sufficiency at pension start - Who needs it…Is it necessary to have a high probability of sufficiency at the start of a pension?
Only if the pensioner is relying on the pension for Social Security assets test exemption purposes. If there is no Social Security consideration, the law merely requires actuarial opinion as to whether there is a high probability of sufficiency not a high probability per se. Many pensioners prefer to have a high probability to enhance the security of their pension, reduce the risk of needing to adjust their pension if the fund becomes insufficient or to minimise their taxable income, but they do not have to.
Q4:
Insufficiency - Social Security consequences…What are the Social Security consequences of the actuary not being able to certify sufficiency of a fund?
Action to ensure a high probability is necessary. This normally takes the form of a reduction in pension. This is normally achieved by commutation of the initial pension and establishment of a new pension. This process has consequences under the deprivation provisions of the legislation. The difference between the "high probability" cost of the pension and its Social Security valuation is deemed to have been a gift for these provisions.
Q5:
Insufficiency - Tax consequences…What are the tax consequences of the actuary not being able to certify sufficiency of a fund?
Action to restore sufficiency is necessary. The actuary is obliged to issue a Section 130 notice querying the trustee as to how it plans to restore sufficiency and to report failures to restore sufficiency to the ATO. Sufficiency may be restored by either suspension of indexation or a reduction in pension. A pension reduction is normally effected by commutation of the initial pension and establishment of a new pension.
