Operating a number of pensions from an SMSF may be a better option for some members rather than seeking to merge them into a single retirement income stream for the sake of simpler administration, a specialist lawyer has stated.
DBA Lawyers special counsel Bryce Figot said it was possible to end up with more than one pension in an SMSF and these could provide a way to avoid a tax penalty where a minimum payment failure had occurred.
“Let’s say I’m still working in a transition-to-retirement phase and have money in accumulation so start a pension, but as I’m still working, more money goes into the fund,” Figot said during an online briefing hosted by the legal firm last Friday.
“With the money that’s just been contributed, I start another pension and as I’m still working, more contributions go into the fund, so I start a third pension.
“This is one way you might end up with various little pensions because you cannot add to the capital supporting a pension by way of contribution or rollover.”
He said in cases such as these it was possible retaining the smaller pensions would help manage exempt current pension income (ECPI) issues where a pension failed to make a minimum payment.
“If you have got one pension and you fail to pay the minimum, you are in for world of pain,” he said.
“It’s a painful situation because odds are you will miss out on your ECPI exemption for the whole year. So the whole fund is going to be paying income tax for the whole year.
“If you had lots of little pensions, the failure to meet a minimum could just be attributed to one pension.
“If I’ve got four pensions and the failure to meet the minimum is attributed to that one, the other three satisfy the minimum rules and only a quarter of the fund’s income is taxable.”
He added the process to merge pensions was very difficult in that each pension would have to pay a pro-rated minimum for the financial year and the ATO would require a request from the member and the trustee accepting the request to commute the pension, which would also require a valuation at market rates and transfer balance account report (TBAR).
“You would also have to think about the implications of merging the tax-free and taxable components together and do the process in reverse,” he said.
“To start one pension would involve things like a member request, trustee resolutions, a TBAR and advice. It’s not impossible, but it is an administration nightmare.”
