SMSF members who held off starting a pension earlier this year may consider doing so now, with lower markets providing some tax benefits, according to an SMSF technical specialist.
Heffron senior SMSF specialist Alex Denham said the decision to start a pension during the COVID-19-related market downturn was one that should be based on financial advice, but from a technical and tax point of view the present time may be beneficial for some people.
Speaking during a Heffron webinar late last week, Denham said the SMSF members who may have struggled with the transfer balance cap (TBC) earlier in the year are now likely to have lower accumulation accounts due to the state of investment markets.
This worked in their favour because it would create a smaller credit to the transfer balance account in the event a pension was started in the current market conditions.
“If someone in January had $1.7 million in accumulation and it has gone down to $1.3 million, if they have meet condition of release, they can commence a pension.” Denham said.
“In January they could only do this with $1.6 million in the pension and $100,000 remaining in accumulation, having used all their contributions cap space with no further options for contributions into pension phase.
“If they did not lock in at that time and are now sitting at $1.3 million and decide to start here, they will get $1.3 million to TBC and still have $300,000 of cap space left. If over the next few years the market recovers, that growth doesn’t count towards the TBC.”
She said any recovery in investment markets would not be counted towards the TBC and could also be used to start a pension, creating another credit to the TBC while using their contribution cap space, and rather than having any funds in accumulation, they would have 100 per cent exempt current pension income (ECPI).
“This is a good time for people who have fallen into that niche category, who have met a condition of release but were over the TBC and are now under, to have a think about locking that lower amount in,” she said.
She also noted the timing was good for SMSF members who were considering commencing a part pension as they hold a higher proportion of funds in pension phase.
“An example is of someone with $2 million who was planning on starting a pension with $1 million, but that balance is now down to $1.5 million and they still start with $1 million in the pension,” she said.
“That person will have a higher portion of the fund as ECPI and tax-free, and that could be a benefit to starting a pension at this time.”
