Retirement, Strategy

Drawdown strategies must maximise tax position

Advisers must work with their SMSF clients to ensure they maintain the optimal tax position of the fund when a pension above the minimum drawdown amount is being sought, a technical expert from the sector has said.

“Where we have a member drawing above their minimum, it is an issue on how those payments are going to be treated from the point of view of how much exempt current pension income (ECPI) the fund gets to claim, which means how much of the member’s benefits are not going to be subject to 15 per cent tax,” SuperConcepts SMSF technical services executive manager Mark Ellem told the SMSF Professionals Day 2018, co-hosted by selfmanagedsuper and SuperConcepts.

Ellem said if the pension income being received from the SMSF is above the minimum drawdown level of 4 per cent and the income being generated from the assets supporting the pension is less than the amount drawn down, over time the pension will diminish.

He added if the SMSF had an accumulation account drawing a pension that is greater than the minimum requirement entirely from the pension account, it will erode the more tax-effective part of the fund while building the taxable portion of the fund.

“If we separate those payments out of the fund and only allocate the minimum to the pension account and the rest to the accumulation account, we’re going to have some of the accumulation account being drawn down over time,” he noted.

“This will maximise the fund’s ECPI claim by retaining as much as possible in the pension account.”

He pointed out the strategy would not attract any additional administrative burden for trustees either.

“If we consider the TBAR (transfer balance account report) requirements, we’ve got pension payments out of the pension account. Do they need to be reported on the TBAR? No. Pension payments don’t get reported for TBAR purposes,” he said.

“And we’ve got lump sums from the accumulation account. They’re not reported on the TBAR either.

“We’ve got no TBAR requirements, so by saving some tax for the fund we won’t be offsetting it by increasing compliance costs through having more TBAR obligations.”

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