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Planning for pension complexity will be tough

The pension environment will be made much more complex by the new superannuation legislation and will require careful planning strategies and greater due diligence, according to McPherson Super Consulting director Stuart Forsyth.

“The new $1.6 million transfer balance cap is complex because it has to deal with multiple pensions commenced at different times, and then, in some cases, reversionary pensions and child pensions,” Forsyth told selfmanagedsuper.

“It’s a complex measure because it also has to deal with what we call legacy pensions, which are old defined benefit pensions, and that all has to interact with what’s essentially a tax mechanism – you’ve got to value accounts, you’ve got to value pensions and you’ve got to bring all of that together into a formula, and there’ll be a lot of reporting.

“And, for example, people who have existing pensions may have to stop them and stop receiving that pension, and transfer their account balance back to accumulation.

“They might have to do that to all of their account or perhaps parts of their account. So yes, it is complex.”

Forsyth will be presenting a session on pensions at the upcoming Self-managed Independent Superannuation Funds Association (SISFA) SMSF Forum on 18 November in Melbourne.

“I’ll be going through pension planning strategies, including the new $1.6 million transfer balance cap and transition-to-retirement income streams, and defined benefit pensions, including the old defined benefit pensions paid out of SMSFs,” he revealed.

“The aim is to give advisers and SMSFs an idea of what they can do now in preparation for 1 July 2017, and go through the consequences of these changes, as well as practical advice from what we know.”

The former ATO superannuation assistant deputy commissioner said the new laws could be relatively straightforward for clients who only had one super fund and if it was an SMSF.

“A lot of the complexity will come when people have multiple pensions, particularly across different types of funds – so an APRA (Australian Prudential Regulation Authority) fund, a pension, a defined benefit pension and an account-based pension would be complex to look at,” he noted.

“The proposed law has to deal with all of these situations, not just the common [scenario], and advisers also have to deal with all of these situations.

“There are a surprising amount of people with defined benefit pensions and some of them have not previously been affected by [changes], but they’re going to be brought into this regime.”

He said he believed advisers should currently be reviewing all of their clients.

“It’s going to be quite late if we don’t get law until April or May and it may be the case that the majority of their clients are in a relatively simple position, or it might be that there are complexities they don’t even know about,” he said.

“One of my concerns is that we might finish up with some very confused pensioners who don’t really understand what’s going on and what’s happening. In fact, we’re seeing signs of that already – people are worried about it.

“Until you have law, it’s hard to tell your clients that it is or is not going to affect them because it’s determined by their situation and the final law.”

More information about the SISFA SMSF Forum can be found here.

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