SMSF members planning to start new pensions using recontributions need to get the timing correct or risk undermining the strategy and losing any intended tax benefits, according to an SMSF technical expert.
Smarter SMSF chief executive Aaron Dunn said members using multi-pension strategies had to report their intended action for every pension they intended to draw down.
Speaking during a webinar today, Dunn said commuting amounts above the minimum pension from an existing income stream to recontribute and create a new pension, required a clear understanding of the steps involved.
“We want to make sure that our instructions around the treatment of these benefit payments are prospective and consistent for the year in which that is occurring,” he advised.
“What we have ordinarily seen in the past is a standard process where the minimum pension gives us a tax exemption and we then look to take a lump sum out of the accumulation interest, which improves the ratio of retirement-phase income streams to accumulation-phase interests, increasing the tax exemption in the fund.
“If we don’t have an accumulation account, we are looking to undertake a partial commutation which gives us a debit against that member’s transfer balance cap, which means it gives us more cap space in the future.
“There may be circumstances where you might need to look at switching [where the lump is drawn], which is going to be dependent upon the components of the pension and the accumulation accounts.”
According to Dunn if the lump sum has to be taken from the accumulation account, the member may want to reconsider this action or alternatively elect to commute from the pension if it has the higher taxable component.
“There is no hard-and-fast rule here, but you need to contemplate the differences between the exempt current pension income benefit you’re looking to obtain via that amount in accumulation or look at the commutation requirements because you want to ensure that you are commuting from the highest taxable component,” he said.
“The timing of notices here is crucial because where pensions are starting with contributions that have been made if we don’t put in place valid notices that are signed and executed within the right timeframes, you will end up in a position where the notice will be invalid, therefore denied the deduction, which will impact the components in which that income stream starts.”
