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Do multiple pensions provide multiple problems?

With a lot of focus on the lead-up to year end, particularly when dealing with the upcoming changes to super from 1 July, some SMSF trustees may face additional issues due to members having multiple pensions.

This issue will arise for those who need to roll some money back to accumulation phase to deal with the new $1.6 million pension transfer cap and ideally taking this action before 1 July in order to avail themselves of potential capital gains tax relief.

SMSF trustees will also no longer be able to segregate assets for tax purpose to certain pension interests where a member has a total super balance that exceeds $1.6 million and they are in receipt of a retirement-phase income stream.

The consideration of how to deal with multiple pensions and which one (or ones) to reduce to bring someone under the $1.6 million cap is important as it may influence future estate planning outcomes on the death of a member or may (depending on their age) have an impact on their personal tax position.

As a starting point, it may be worth considering why some people have multiple pensions in the first place. Some reasons for running multiple pensions could have included:

• An original pension had commenced and the member subsequently made additional contributions to the fund. Those new contributions were subsequently rolled into a second account-based pension rather than ‘added’ to the original pension. And given you can’t technically just add money to an existing pension, but rather have to commute the original pension, combine the money and then restart, some have found it easier just to have multiple pensions.

• There may have been Centrelink considerations for stopping the original pension, such as the potential to lose grandfathered assessment rules under means tests.

• Multiple pensions (particularly if reversionary) may have been established as part of an estate planning process so that there was certainty on who certain residual amounts would be paid to upon the passing of the original member.

• A member had commenced their own pension from their SMSF (or another fund) and then become entitled to receive a death benefit pension from the SMSF (or another fund) as a result of the passing of their spouse.

While running multiple pensions, particularly in an SMSF, may not ordinarily impose a lot of additional concern, if members are needing to roll back some of their existing pension balances to comply with the new $1.6 million pension transfer cap, it may be important to consider which pension to roll back from.

The first consideration that comes up is whether the pensions have differing underlying tax components – that is, different ratios of taxable and tax-free elements. For members aged 60 and over, this has very little impact for them personally as payments they receive from the fund will be tax-free to them, whether the payments are coming from accumulation or pension phase.

However, there may be estate planning considerations as taxable components flowing through to adult children can be taxable in their hands when distributed as a death benefit from super. If a member has a desire to maximise the tax effectiveness of future bequests from their super, then the best approach to consider may be rolling back to accumulation phase from pensions with the highest taxable component first. The reason for this is when you commence a pension, the underlying tax components (that is, tax-free versus taxable) are fixed as a percentage for that pension. Every dollar of earnings in that pension account will also accumulate in that proportion. By keeping a higher percentage of tax-free money in pension phase post-1 July, the level of tax-free component can continue to rise. On the other hand, when a tax-free amount is moved to an accumulation account, it becomes a fixed dollar amount, and any earnings on assets supporting accumulation balances will form part of the taxable component into the future.

For clients under 60, there are also some benefits in adjusting their pensions in the same way. Leaving the maximum tax-free amounts in pension phase may lead to increased tax efficiency on their pension payments. In addition to the extent they need to draw additional money from accumulation phase, they may be able to obtain a greater benefit using the low-rate cap threshold available for the taxable component of lump sum benefit payments.

While many of these issues have been discussed in the context of an SMSF, advisers need to consider similar outcomes where they have clients with multiple pensions in a retail or public fund, or where pensions exist for a client across multiple superannuation funds. However, ensuring your clients are getting the right guidance on the actions to take in the lead-up to 30 June can assist in ensuring retirement and estate planning goals are not affected by the upcoming changes to super in a way that can’t be managed appropriately.

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