Financial Planning, Pensions

End-of-year pension planning too late

Advisers who are considering how to structure the pension arrangements of clients with an SMSF are probably doing it at the wrong end of the financial year, according to an SMSF expert, who has recommended pension planning take place in July each year.

SmarterSMSF chief executive Aaron Dunn said advisers who were still looking at pension arrangements at the end of the tax year were doing something that historically took place, but the timing had shifted with the introduction of the transfer balance cap.

“The reality is now we have a different framework to work in, especially where a fund has two members who may be tax dependants and if one dies the survivor may have an amount that goes above the transfer balance cap,” Dunn said.

Speaking as part of a webinar addressing end-of-year tax planning for SMSFs, he said the introduction of the transfer balance cap introduced a pecking order in how benefits may be taken and these needed to be considered at the start of the tax year to avoid problems for the member.

He said the order required an SMSF to meet the minimum pension drawdown amount first, thus ensuring its exempt current pension income status, before picking up lump sums from any accumulation benefits, which could also be used to maximise the level of earning tax redemptions as the accumulation levels in the fund declined.

Partial commutations could also be used, but they should come last in the order as a clawback strategy against the credit balance of the member’s transfer balance cap, he noted.

“The reason we need to be across these changes and this order is because the ATO has made it clear what makes a commutation valid and it must be prospective, and must have a member request and trustee acceptance that specifies what needs to be satisfied for a valid commutation,” he said.

“This approach requires a complete rethink and overhaul in dealing with annual pension documents and decisions around clients that may have a potential estate planning issue in future and look like taking more than the minimum pension in the coming year.”

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