For the purposes of the $1.6m pension cap (transfer balance cap), defined benefit pensions (e.g. lifetime pensions historically received in the public sector and some private sector legacy pensions, such as market linked pensions) will be subject to special valuation rules as these pensions do not generally have an underlying capital balance (ie they are a lifetime pension with no capital value).
Defined benefit pensions will be valued by multiplying the annual pension entitlement by 16. In other words, a lifetime pension of $100,000 per annum will use 100% of the $1.6m pension cap, which would appear to be a reasonably generous outcome compared to the outcome for private sector pensions.
Market linked pensions will be valued by multiplying the annual pension entitlement by the remaining term of years of the pension.
Excess defined benefit pensions will not result in a breach of a person’s transfer balance cap, rather the recipient will pay some top up tax personally on the pension income.
