Plunging super values don't mean you can top up

Q: I’m 70 and I started my superannuation pension years ago. In 2017 it was reset to $1.6 million and the rest of my super stayed in my self-managed superannuation fund (SMSF) but in a separate account. Now my pension is only worth a bit over $1.3 million because of the falls in the sharemarket. Can I transfer an extra $300,000 into my pension now? - Emma 

A: The short answer, unfortunately, is no. These days everyone with a pension like yours has what’s known as a “transfer balance account”. Think of this as a running tally of all the amounts you have ever put into a superannuation pension over your lifetime since July 1, 2017. It bears no relationship to what your pension is worth today, it’s just adding up all the amounts you’ve put into pensions in the past. In 2017, $1.6 million was added to your running tally. 

If you turn off some or all of your pension or take out an amount as a special lump sum rather than a normal pension payment (known as “commuting”), an amount is knocked off your running tally. 

For example, if you took a special lump sum of $200,000 out of your pension (over and above your normal pension payments), $200,000 would be deducted from your transfer balance account and your running tally would be $1.4 million ($1.6 million minus $200,000). 

Unfortunately things like taking normal pension payments and increases or falls in your pension account because of investment earnings don’t have any impact on this running tally. 

As a result, your running tally is still $1.6 million (assuming you’ve never taken any commutations) even though your pension balance is down to $1.3 million. 

That means you can’t start an extra pension with $300,000 because then your running tally would be $1.9 million (the original $1.6 million from 2017 plus the new $300,000). This is too high because it’s your running tally (not your pension balance) that gets checked against the $1.6 million limit on pensions. 

Don't try to beat the system 

You might think one way of beating the system is to stop your pension completely now, wait until markets improve and then start your pension again when your super is back up to pre-2020 levels. While that sounds reasonable, it’s actually the worst thing to do. 

If you stop your pension today, your running tally will be $300,000 (your original $1.6 million less $1.3 million which is the value of the pension when you stop it). Let’s say you waited until markets had recovered – that is, your “ex” pension account was back up to $1.6 million. If you started your pension again, your running tally would now be $1.9 million ($1.6 million from 2017, less $1.3 million when you commuted it plus $1.6 million when you start your pension again). This would be disastrous. 

This probably sounds quite unfair in your case – you left as much of your super in a pension as you could at the time ($1.6 million in 2017) and the fall in asset values means it’s now worth far less. 

The government did recognise that this was a potential problem when the law was introduced and even then, it indicated that it might review the way the limits worked if a big event occurred. At this stage, it has not done so, which means that, at least for the time being, the rules are unchanged. 

Bear in mind that you can leave your pension completely untouched while asset values improve. 

Just like market falls don’t help you (by reducing your running tally), market rises also don’t work against you (by increasing it). So if you leave your pension exactly as it is for now and one day it grows back to $1.6 million or even beyond, your running tally will still be $1.6 million. Even if your pension account is worth way more (say $2 million), you will still be deemed to be within the legal limits because the only number checked against the $1.6 million pension limit is the running tally. 

Pension payment adjustments 

There is also one silver lining for you. You can draw less in pension payments during 2019-20 than you might have expected. 

In its second stimulus package, the government introduced a special short-term 50 per cent reduction for compulsory pension payments during 2019-20 and 2020-21. For you, this means in 2019-20 you have to take only 2.5 per cent of your pension account as a pension payment rather than the normal 5 per cent. The value used for your pension account here is whatever it was worth on July 1, 2019. That might be a lot more than it’s worth today. 

Bear in mind, however, that in 2020-21, the minimum pension payment you must take will be 2.5 per cent of whatever your pension account is worth on July 1, 2020. Assuming markets have not recovered by then, that’s likely to be much less than you’ve had to take in previous years. Of course you can take more if you want to, but this will give you some flexibility to take as little as possible from your pension account while it recovers. 

- Originally published in "Australian Financial Review"