Waiting for indexation may not be optimal

waiting indexation pension

Waiting until 1 July 2023 to commence an SMSF pension for the first time due to indexation may not be the most beneficial strategy for members.

An SMSF actuary has suggested waiting for the next round of indexation to be applied before commencing a pension for the first time to take advantage of a larger transfer balance cap (TBC), while intuitive, is not necessarily the most beneficial strategy for a fund member.

“If it was 30 June 2023, then absolutely, waiting is a good idea. You might as well wait until tomorrow and start it then,” Heffron managing director Meg Heffron told delegates at the SMSF Association National Conference 2023 in Melbourne today.

“But in February is it a good idea?”

The opportunity cost of waiting to start an initial pension to the value of $1.7 million this year is the ability to claim exempt current pension income (ECPI) in the 2023 financial year.

“And the amount of current pension income really depends on how much of the year they’ve got left,” Heffron said.

Using an example where a member could start a pension of $1.7 million now with a 5 per cent investment return, she noted the ECPI this year would be $4250.

“That’s the cost of waiting or the benefit of starting now,” she acknowledged.

“The benefit of waiting is slightly harder to determine because what’s the benefit of putting an extra $200,000 into a pension because I know conceptually the benefit is I have a bigger pension so I get more in ECPI in the future.”

According to Heffron, the long time horizon of the waiting strategy makes having the additional $200,000 of pension balance and associated returns almost trivial.

“So I’d almost say it’s not crazy to start pensions now if that’s where you’re at,” she said.

Further, if the fund experienced a large capital gain in the 2023 financial year, she noted this would be another element to favour commencing a pension immediately.

“A big factor for now is what are you looking at in terms of taxable income this year. If you’ve already made a large capital gain this year, don’t immediately write that off [because it’s happened] before the pension so it’s not relevant,” she said.

“It totally is because you’ll get an actuarial percentage [of ECPI] for the whole year.

“So if you’ve made a large capital gain already, it may be absolutely worthwhile starting a pension now even though you’re going to undersell your transfer balance cap.”

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