Documentation, Pensions, SMSF

Pension contracts can add legal assurance

Pension contract SMSF SIS Act

Using a pension contract to specify the rules for an income stream can offer greater legal certainty and administrative control to SMSF trustees.

The use of a pension contract to dictate how an income stream can be paid to an SMSF member may provide more certainty in the event the arrangement is challenged in court, according to a technical specialist.

“Pension documents [are the] the future for litigation in the SMSF space. Surely it’s not going to be too long until we see court cases that incorporate whether a pension was or was not reversionary and what the consequences of that are from a beneficiary or a legal challenge point of view,” Smarter SMSF education and technical manager Tim Miller said during a SuperGuardian webinar yesterday.

“We are always seeing changes with regards to the way pensions are commenced and, again, the Retirement Income Covenant may result in more changes to SMSF pensions moving forward. It’s really important that both our documentation and our deed are aligned with what we can do with reference to a superannuation pension.

“Over the last 10 to 15 years we’ve seen the advent of pension contracts, where the deed will say that the fund can pay an income stream in accordance with the terms and conditions of the pension agreement or the pension contract, and then that pension contract will be utilised to specify what the rules of the pension are, which will often then align those rules to the requirements of the SIS [Superannuation Industry (Supervision)] Act.

Miller pointed out these types of arrangements enable trustees to exercise more control over the management of an income stream and mitigate future administrative issues.

“[A pension contract] will make commentary about reversionary pensions, commutability and those sorts of things. So, if you’re wanting to put restrictions in place inside a pension, then that would normally form part of those pension contracts that are written in accordance with the trust deed,” he noted.

“[For example], do the terms of the pension allow you to change from reversionary to non-reversionary or vice versa because if there’s nothing stipulated, then the reality is you can’t do that. You would have to commute and stop the pension and start a new pension.

“Stopping and starting a new pension will have ramifications from a transfer balance cap, strategic planning and estate planning point of view that we need to factor in.”

He also cautioned against the use of the standard templates supplied by document providers as they may not necessarily provide the ability to amend elements of the pension without risk.

“I can guarantee you that any pension that is set up exclusively using the software provider documents, unless those software document providers are linked to an external document provider, the generic documents won’t have some of these issues covered off adequately enough,” he said.

“So ensuring that the terms of the pension are as you want them to be and that you’re comfortable that the documentation stacks up in the event that it’s going to be challenged at some point in time [is key].”

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital