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Pro rata payments may cause breach

pro rata pension commutation

SMSFs could be in breach if the fund has used an asset transfer to commute a pension but overlooked required pro rata payments.

An SMSF administration firm has warned funds could be in breach of pension standards if they fail to correctly factor in pro rata pension payments when conducting a commutation.

SuperConcepts SMSF technical and strategic solutions executive manager Philip La Greca said the traps associated with the pro rata payments are the result of SMSF members overlooking them when considering commutation strategies.

“You need to be conscious of what happens when you commute a pension because a commutation is basically a payment of a lump sum from a pension and that could be partial commutation or it could be a full commutation,” La Greca said during a webinar today.

“The pro rata minimum has to be paid prior to any full commutations and it does not matter what type of commutation it is.

“Now, one of the big traps here is that the pro rata calculation includes the day of the commutations. That is one of the key reasons why we never do commutations on 1 July because if you do a commutation on that date, it means paying the minimum pension payment amount as a pension payment for one day.”

He noted that with a commutation, an SMSF can cash the funds out to the member, roll them back into accumulation phase or potentially do both if the pension has ceased and there were problems for funds that pay pro rata minimum pensions as an asset transfer.

“If you’re doing this as an asset transfer, well then you have a problem. The fund has technically breached the pension standards and there are definitely fines for that,” he said.

“The partial commutations don’t require you to have made the pro rata minimum before you make the partial commutation, but clearly you need to be conscious of what you have left.

“For instance, you couldn’t have $100,000 in a pension account and say ‘I’m going to commute $99,000 of it and leave $1000’ if the minimum pension required is $4000.

“They haven’t left enough to meet the pro rata payment when they should have ensured that was the case.”

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