STRATEGY
The pension toolkit Practitioners need to consider many elements when providing advice related to pension strategies. Tim Miller details the options available and their implications with regard to income streams.
TIM MILLER is education manager at SuperGuardian.
In issue 35 of this magazine, in an article titled “When more than one is better”, I identified multiple pensions could be commenced to isolate contributions or benefit components for estate planning purposes and that pro-rata requirements should be considered when determining the use of such strategies. This is just one of a number of strategies advisers need in their pension toolkits when discussing how best to handle pensions in a post-super reform environment. With the onset of non-work-related contributions up to age 75 coming into effect from 1 July, now is a great opportunity to look at other key considerations for your pension clients.
Partial commutations versus withdrawals Lump sum benefits, in the form of a partial commutation, do not count towards the minimum pension requirement and can be an in-specie payment, unlike pension payments, which must be in cash. If a member wants to take a benefit that exceeds their minimum pension requirement, there may be circumstances where it might be more appropriate to treat the benefit as a lump sum rather than a pension. If an amount is not to be treated as a pension payment, the member must notify the fund trustees of their intention to take the benefit as a superannuation lump sum so this can be reported against their transfer balance account (TBA) within the appropriate timeframe. As partial commutations are a debit to the TBA, they provide future transfer balance cap (TBC) space for the member. Therefore, consideration should be given to how withdrawals are treated each year, especially in light of the government’s recent decision to extend the 50 per cent minimum pension drawdown discount for 2022/23.
For an SMSF the allocation of payments as a lump sum or a pension and whether to take it from a pension interest or an accumulation interest can impact the tax paid by the fund.
Withdrawal options There are alternatives for how any amount above the minimum pension can be accounted for by SMSF trustees, subject to whether the member has an additional accumulation interest or not.
Lump sum withdrawal from accumulation account If available, the excess amount may be withdrawn from an accumulation interest. Withdrawing from an accumulation interest does not reduce the personal TBC as this relates only to amounts held in a retirement-phase pension interest. However, it does reduce the amount of taxable component of the fund, meaning more of the income, including capital gains, will ultimately be exempt from tax. Drawing down from the accumulation portion of the fund will generally increase the exempt income percentage for the year as determined by an actuary. The higher the percentage, the lower the income tax for the SMSF.
Lump sum withdrawal from pension account While the above option is only available where accumulation interests exist, members may also choose to withdraw the excess over their minimum pension requirement as a partial commutation lump sum from their retirement-phase pension account(s) to free up some of their personal TBC space. Additional space within this cap can enable future contributions or rollovers from other funds Continued on next page
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