Pensions need adjusting to deal with the impact of falling markets.
To better manage market downturn effects on superannuation assets and associated pensions, self managed superannuation fund (SMSF) trustees should consider adjusting their pension payments now, according to a specialist in the sector.
Strategies include re-striking the pension limit, partially rolling back the pension, or implementing a capital injection into the pension, Townsends Business and Corporate Lawyers special counsel Michael Hallinan said.
Re-striking the pension limit involves commuting the existing pension and commencing a new pension, using the lower value of the underlying assets as the basis for the new pension limit.
If a pension value has fallen from $400,000 to $240,000, the current pension would be commuted and a new one commenced, using the new balance of $240,000 as the basis.
Partially rolling back a pension involves commuting the existing pension and commencing a new one with an uncorrelated lower balance.
Here, if an individual's original transition to retirement pension was $600,000, but fell to $360,000, the pension would be commuted and a new pension using a balance of $160,000 would be set up. The remaining $200,000 would then be rolled back into the accumulation component of the SMSF.
A capital injection strategy means an individual would commute their existing pension and allocate more capital, to return the pension balance to its original level, before staring a new pension.
In all these strategies the new pension payment would have to be prorated against the remaining days to June 30, so the earlier they are adopted the more advantageous they would be. Pension limits are recalculated on July 1.
However, these strategies do not overcome the fundamental issue that value has been lost in the pension account, Hallinan said.
"We are now just taking that value out at a much lower rate than would otherwise apply," he said.
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