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Pension-phase rollback advantageous

Advisers and trustees should be looking to roll back any money over $1.6 million from pension phase to accumulation phase once the proposed transfer balance cap was implemented, regardless of whether any provisions forcing that course of action were introduced, according to an SMSF strategist.

Not doing so would be significantly disadvantageous for an SMSF due to the current pension drawdown rules, NowInfinity principal Grant Abbott told the SMSF Strategies Day 2016 held in Sydney last week.

Abbott used the case of a client who had $2.6 million in pension phase to illustrate the point.

“Why would I leave $2.6 million in a pension account when I have to draw out a minimum payment if $1 million of it is going to be taxed as if it’s in accumulation phase?” he said.

“Why wouldn’t I just leave $1.6 million in the pension account and transfer the rest to the accumulation account where I wouldn’t have to draw upon it?”

To prepare for the $1.6 million transfer balance cap, he advised SMSFs with existing pension accounts close to the cap should stop automatically distributing fund income across all accounts from 1 July 2015 onwards and before the 2015/16 return was lodged.

“So if someone’s already in pension phase and they’ve got $1 million or thereabouts in the account, or they’re over the $1.6 million limit, you should stop the income getting to those accounts because otherwise it’s exacerbating the problem,” he noted.

“SMSF trustees would already have the income of the fund for the year ended 30 June 2016, but wouldn’t have prepared the accounts or lodged the return yet.

“Ordinarily the administration system of the fund, if you don’t do anything with it, proportionally allocates the income to all of the accounts.

“But why would you be doing that if your pension account is already over $1.6 million if you’re going to have to change things and bring those allocated income amounts back to accumulation phase?”

To facilitate that strategy, he said advisers should recommend their clients direct the fund income in question into a reserve.

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