Partial commutations and transition to retirement pensions

Generally, transition to retirement pensions cannot be commuted: that is cashed out as a superannuation lump sum payment to the member.  This limitation of cashing out, ceases to apply when the member satisfies an unrestricted release condition – which is typically attaining age 65 or satisfying the retirement definition before attaining age 65. 

This limitation is imposed because the superannuation interest supporting the pension is still subject to preservation (which is a fancy term for the superannuation interest not yet being fully accessible to the member).

If a transition to retirement pension has commenced from a superannuation interest, which is in part still subject to preservation and in part has ceased to be subject to preservation, that pension will, despite being a transition to retirement pension and despite the member not satisfying an unrestricted release condition be partially commutable and able to be cashed out in part.  The payment arising from the partial commutation will be taxed as a superannuation lump sum (which if the partial commutation occurs before the member attains age 60 and the payment is within the low cap tax threshold (currently $185,000 for 2014/15 tax year) will be tax free.

Three points need to be noted about this strategy.

First, it is uncommon for a superannuation interest, from which a transition to retirement pension has been paid, to contain both preserved and non-preserved components.  Generally, the superannuation interest will be entirely preserved or entirely unpreserved.  If the former, the pension must be a transition to retirement pension.  If the latter, then the pension can be an account-based pension and so the partial commutation issue does not arise.

Second, the preservation components of the superannuation supporting a pension are not static and set at the commencement of the pension – (unlike the tax components which are fixed at the commencement of the pension).  Payments must first be made from the non-preserved component and, once the non-preserved component is exhausted then from the preserved component.  Consequently, it may be that the non-preserved component has already been exhausted at the time the partial commutation is made.

Third, as the pension is a transition to retirement pension, the 10% ceiling will continue to apply until the member attains age 65 or earlier retires.