Pensions, Strategy

Indexation drives need for clear vision

indexation pension strategy

Changes due to indexation and COVID-19 related market movements require backward and forward views when setting out pension strategies.

Changes to concessional contributions and the transfer balance cap (TBC) due to indexation have given advisers hindsight on what strategies they can adopt, but will require them to adopt some foresight in the timing of pensions, according to an SMSF technical expert.

SuperGuardian education manager Tim Miller said the changes to concessional contributions brought about by indexation, which took effect from 1 July, combined with new bring-forward provisions allowed advisers to look backwards when planning on what strategies to use.

“At present, we have a once-in-a-lifetime event like COVID-19, on top of market corrections, and those build into the cycle of downturns and corrections, which is the reality of the last 20 years,” Miller said in a recent webinar.

“Maximising downturns and the opportunities they create is a mix of hindsight versus foresight and contributions strategies have been given more hindsight, while pensions strategies will need foresight to maximise benefits where there is a decrease in valuations and changes to transfer balance caps.”

He said this two-sided view was important in the lead-up to the end of the last financial year when advisers and SMSF clients had to consider when was the right time to commence a pension and what the new requirements would be around the personal TBC.

While questions also needed to be asked about the use of bring-forward arrangements for non-concessional contributions in the last financial year, the strategy could be revisited and reused this year as well, he said

“The carry forward is one of the greatest measures introduced in the last 10 to 15 years for superannuation. It’s just a shame that it’s linked to a $500,000 limit,” he said.

“The whole idea of not maximising in one year so therefore you can use it again in the future, that to me without a threshold would be the ultimate contribution strategy.”

In the lead-up to 30 June, SMSF members were questioning if they were eligible to use the bring-forward provisions, and depending on fund balances and age the positions were clear cut compared to the question of how a pension strategy could make the most of current and future investment market positions, he noted.

Miller pointed to the question of whether an SMSF member should have started a pension before or after 1 July 2021, with the latter action giving a higher cap, but also introducing exempt current pension income considerations, and said these types of decisions required foresight.

As an example, he referred to the fact an SMSF member with a $1.6 million balance on 1 July 2020 could now have a current balance of more than $2 million from market returns alone.

“From an ASX (Australian Securities Exchange) point of view, the All Ords index is up 27 per cent since 30 June 2020 and other parts of the market are even higher, showing that the doom and gloom of March 2020 and COVID was an anomaly and the drop off has been regained,” he said.

“Subject to how an SMSF invested, the value of assets in that fund may have gone beyond the TBC from a pension strategy point of view.

“So the differences between valuations in March 2020 and June 2021 are almost double and they will have impact on the ability to make contributions and commence a pension.

“We can’t backdate pension commencements, but we can have a conversation to identify when a trustee wants to start a pension and why hindsight is a good thing and use it as foresight to set a future strategy reference point.”

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