SMSF members engaging in a recontribution strategy must inform the fund withdrawals from a pension interest are commutations and while these notices cannot be backdated, they can be set up well in advance, an SMSF technical expert has advised.
Heffron managing director Meg Heffron said super fund members in pension phase with balances close to the general transfer balance cap (TBC) of $1.9 million need to ensure any withdrawals are noted as a commutation, which will reduce their TBC and allow them to make the recontribution.
However, the timing of this notification was important, but could be preconfigured to avoid the withdrawal only being treated as a pension payment.
“The issue with a commutation is if a fund member has got a pension interest and they take money from it, the default setting is that it will be treated as a pension payment,” Heffron said at the recent ASF Audits Technical Seminar in Adelaide.
“It only becomes a commutation if the member requests it and the trustee agrees in advance that that is so. As such, it’s common to see paperwork that’s actually backdated to pretend that the paperwork is being put in place at the time that happened.”
She said there was no need to work backwards when looking to instruct the fund trustee about a commutation and instructions could be given each year that automatically addressed the difference between a pension payment and commutation.
“We don’t need to bother with that [timing issue] anymore as you just have paperwork that says: “I’m recording a decision that we made back on a certain day to do this,’” she said.
“We have paperwork now in our funds, which we do at the start of the year, which says: ‘Anything I take will make my up minimum pension payment first and then once I’ve met my minimum, everything will be a commutation from that pension.’
“I would put that paperwork in place once, at the start of year, and when all the transactions happen, you have already done your paperwork for them.”
During the same presentation, she noted people who had yet to reach age 65 or enter pension phase could use transition-to-retirement income stream pensions to get a head start on a recontribution strategy without impacting their TBC.
