A senior SMSF stakeholder has highlighted the complex nature of determining the value of a legacy pension members are looking to commute under the five-year amnesty introduced in December 2024 with regard to the record-keeping of the fund.
To this end, Smarter SMSF education and technical manager Tim Miller recognised any legacy pension amount attributed to a particular member in the fund’s set of accounts cannot be taken at face value for the purpose of the exercise.
“While [the accounts might reflect] the [legacy pension] value is sitting in a member account balance, for actuarial and tax purposes that money does not belong to the member,” Miller told attendees of a SuperGuardian webinar held last week.
Further, he pointed out the details of which practitioners need to be aware with regard to the SMSF administration software they are currently using.
“We’ve got three major players in the software space in the self-managed [super] industry. We’ve got BGL and Class and SuperMate,” he acknowledged.
“So what we need to understand is how [these pensions] are being recorded [by these service providers]. Is there an active lifetime pension in place? How is that recorded inside the system? Is there an inactive lifetime pension? So the member has passed away so it’s sitting there in limbo conceptually in a reserve situation. Do we have an active term? Do we have an inactive term? Do we have a flexi-pension and how is it all recorded?”
He then proceeded to indicate the different information the three software applications will provide and the way it needs to be interpreted.
“SuperMate [doesn’t] actually represent any balance in the member’s account. So the member exists, but it doesn’t recognise any balance in the member’s account, [however], in the financial statements it will show the [relevant] money is sitting in a reserve as a not-yet-allocated amount,” he noted.
“So the SuperMate system … created the accounting process where the money sits in a reserve and each year the pension liability is allocated to the member and then paid out.
“So you effectively start a nil balance in the member’s account and you just make an allocation in and a payment out from that reserve account.”
According to Miller, the other two software provider systems report a lifetime pension as a member interest instead of a reserve and that detail is one of which accountants and advisers need to be aware with regard to the value of a legacy pension being commuted.
“That money doesn’t technically belong to the member, it belongs to the reserve for the fund to use as it chooses, it just currently chooses to use that reserve to pay a lifetime pension to the member,” he explained.
“So these numbers are representative of how the systems have allocated the money, but may not necessarily be representative of how the actuary determines [the amount of money making up] each member’s individual interest.”
