SMSF advisers and trustees should recognise and follow a key sequence of steps to maximise the benefits of making a pension drawdown from the super fund, a technical expert has said.
Smarter SMSF chief executive Aaron Dunn said satisfying a member’s minimum pension was the first step in a crucial “pecking order” for fund practitioners assisting members seeking to draw down benefits.
“First, we want to make sure we satisfy our minimum pension [as] this gives us our tax exemption on retirement phase benefits. We want to make sure we tick that off first, [it’s] absolutely critical to the process,” Dunn explained at the recent Smarter SMSF Virtual Day 2021.
He noted practitioners should next consider drawing down from the member’s accumulation interest as this would ensure the SMSF maximised its ability to claim tax exemptions on earnings for current and future financial years.
“[This] will increase the level of retirement phase assets as a percentage of the overall fund’s assets,” Dunn said.
“We’re looking at trying to improve the tax exemption on the fund by taking benefits out of the accumulation phase before drawing anything further above that minimum pension obligation.
“It’s once we’ve exhausted that accumulation account or, if we don’t have that, we then look at this clawback strategy where we would be undertaking some form of partial commutation that will create a debit against the member’s transfer balance cap [TBC].”
Executing a partial commutation could prove particularly crucial in situations involving the death of a member, Dunn pointed out.
“This [step] is important where we know that we’re going to end up with an excess TBC issue [upon the] death of a member and the survivor of the two is obviously going to be above their personal TBC,” he noted.