No matter what time of the year you start your pension (July 1 is the most popular day of the calendar for self-managed super funds), here are five tips to make sure you have all your ducks in a row.Join our newsletter
Make sure all the money is in the fund before starting the pension. It sounds obvious but sometimes it’s not entirely clear in an SMSF.
For example, if the pension will include a contribution that has been made in specie (by transferring assets such as listed shares rather than cash), it’s important to understand when the shares have really been received by the fund. It’s only then that the contribution can be included in a pension. In this example, that happens when the trustee holds properly completed transfer forms.
Of course, the forms also need to be lodged with the share registry, but as long as this is done promptly, the contribution is considered to have been received as soon as the trustee holds the forms.
Sometimes even cash is confusing. When a contribution is made via internet banking, there is often a delay between when it leaves the member’s account and when it arrives in the fund’s account. In most cases, it’s not considered to have been “received” by the fund until it arrives in the fund’s bank account. Only then can the contribution be included in a pension.
Secure tax deductions
Make sure all the right things have been done to lock in tax deductions for personal contributions. Like many things in superannuation, claiming a tax deduction for contributions requires paperwork. It’s absolutely essential that the paperwork is in place before a pension starts. If it’s not, the tax deduction is denied and there is no way to get it back.
Since this paperwork is often done at the end of the year, someone starting a pension now will need to think about their contributions in both 2020-21 and 2021-22.
Organise super splitting
Tip three is for those splitting super contributions with their spouse. This is a common strategy for couples trying to even up their super accounts.
It involves one member of the couple (say, John) telling the trustee to transfer up to 85 per cent of the concessional contributions made for him last year into the super account of his spouse (say, Jane). These splits can normally be made only after the year has ended – so people can generally only split contributions made in, say, 2020-21, some time during 2021-22.
Technically in this example, John could start a pension now before he’s put this paperwork together for 2020-21. But in practice, it’s better to do so beforehand and start his pension once the split has been made.
Double check the amount being put into the pension. Pensions classified as “retirement phase” come with a limit known as the “transfer balance cap”. A retirement phase pension is usually a pension that is paid to someone who has retired or is over 65.
From July 1, 2021, the transfer balance cap became $1.7 million for anyone who hasn’t started a retirement phase pension. It is important the pension doesn’t start with any more than this cap.
In an SMSF, it’s common to want to start a pension but not know exactly how much is in the account – is it just over or just under $1.7 million? The way most people deal with this is to document their pension amount in a way that reflects any uncertainty. For example, their letter to the trustee asking for the pension to be set up might specify that it should start with “the full balance of my account up to my transfer balance cap of $1.7 million”.
This limit does not apply to anyone starting a transition to retirement pension. As the name suggests, these are pensions people start before they retire or turn 65. Transition to retirement pensions don’t get all the tax perks associated with retirement phase pensions and, in return, they are not subject to the transfer balance cap.
Think about the future. When the pensioner dies, what should happen to the pension? It can continue on to a surviving spouse, or it can stop. There are pros and cons to both. The key is to think about it up front so that the right arrangements can be made from the start.
Pensions are exactly what superannuation funds (and particularly SMSFs) are all about – they are precisely how we all turn our retirement nest eggs into income once we retire. But it pays to watch the details to make sure the changeover is all smooth sailing.
This article was first published in the Australian Financial Review 30th September 2021.