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Pension reserve shifts still possible

Pension reserves SMSF account

Moving pension reserves into an SMSF member’s account is still possible as long as it is allocated correctly and the cost of switching is considered.

SMSF members with pension accounts looking to access pension reserves can still do so even if it exceeds their contribution cap, an SMSF technical expert has said.

Heffron managing director Meg Heffron said pension reserves have not received much attention since the release of a regulatory bulletin in 2018 that stated pension reserves cannot be allocated to SMSF pension accounts.

Speaking at the recent Tax Institute 2020 National Superannuation Online Conference, Heffron said a pensioner could receive a reserve allocation, but it had to be directed into an accumulation account and it was treated differently than other funds directed into an SMSF.

“A reserve is not a contribution; it may be treated as such for cap purposes, but it is not a contribution, so there is no need to worry about age, work status, balance sizes or contributions tax,” she said.

The reserve allocation will also not be considered under the concessional contributions cap if it met the ‘5 per cent rule’, which states the allocation had to be ‘fair and reasonable’ and less than 5 per cent of a member’s pension and accumulation-phase interests at the time, she said.

She gave an example of two fund members who each received a 4.9 per cent reserve allocation, with the first member holding $2 million across pension and accumulation phases and the second member holding $1 million in accumulation phase.

The first member could receive an acceptable allocation of $98,000 and the second $49,000, which would go to their accumulation accounts as a preserved amount that was taxable, but would also be accessible if they had met a full condition of release, she said.

“As long as it is the same amount per member and allocated to an accumulation account, that reserve allocation would be fine,” she noted.

“The question to then ask is: do we care if the allocation counts against the concessional contributions cap? Sometimes you don’t.”

Referencing the member who received $98,000, she said the allocation would count towards the cap even if the member was too old to make any other contributions.

“The first $25,000 is within the cap, so there is no contributions tax. The rest is over the cap, so is taxed at normal marginal tax rates, less the 15 per cent tax offset, which is normally put in place where contributions tax is paid first, but in this case there is contributions tax,” she said.

“So, how big would that tax be and would you care the member has to pay tax at marginal rates, less 15 per cent, on $73,000? For the member, who is in retirement, it might not be much money after all.

“For those with pension accounts or pension funds with reserves, do the maths to ensure if it is a real problem to go over the contributions cap.”

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