SMSF Adviser Technical Strategy Day 1 wrap: New legacy pension changes to challenge practitioner strategies for SMSFs 

Heffron managing director Meg Heffron then outlined the key impacts from the federal budget on legacy pensions and the strategies needed to help clients navigate the proposed changes.

She noted that legacy pensions can commonly become a puzzle to entangle for SMSFs, as different aspects of different legacy pensions can create changes in the strategic outcome.

Practitioners need to closely consider core areas that can impact the legacy pension. They include defined benefits that create reserves and capped defined benefits that give tax on pension payments. Further, Ms Heffron said, social security factors can create increasing restrictions along with the need to deal with messy commutations.

This also includes the recent three streams of work from legislative measures, with the first being the fix for life expectancy pension and market-linked pension, which corrects the calculation of debit values of commutations.

Another key change in progress is dealing with permanent excesses after commutations of the pensions. Ms Heffron observed that practitioners need to apply a watch-and-see approach on what the Treasury may do and how it can affect the pension strategy for clients.  

“Given the Treasury is working on this, I’m assuming what they’re going to do is introduce some special rules that would allow clients to take that commutation out, maybe it will allow clients to commute half a million dollars from their new market-linked pension,” Ms Heffron noted.

“It is also interesting for SMSFs with large balances as this may allow clients to commute the excess from their market-linked pension that would actually give them the ability to get out of their market-linked pension entirely and have all of the money back in accumulation phase or take it out of super.

“Basically, the mechanics of the formula at the moment are that anybody who’s taken more than $1.6 million in pension payments would be in exactly the same spot; their excess would be exactly the value of their new market-linked pension,” she said.

“There are still some practical challenges, and I don’t know whether the Treasury will introduce special rules like this, but I wanted to flag that even without the amnesty, clients in this situation could effectively escape their market-linked pension.” 

Whilst the biggest measure seen from the budget is the two-year amnesty proposed to allow SMSFs to get out of legacy pensions entirely, one of the biggest concerns is the tax “sting” on reserves for complying lifetime pensions and life expectancy pensions.

“Our most important job is to keep watching for developments as there is more that is going to happen here,” she said.

“Don’t just wait around until you know what the amnesty is and how the amnesty is going to be legislated. You may find that there’s some great opportunities for you to add value for your market-linked pensioners in particular with very large balances and do something about their situation now.”

Whilst there is yet to be an announcement on how the government will implement these measures, Ms Heffron said that practitioners could consider strategies to mitigate any uncertain risks if the government decides to make no changes.

For example, consider John, who’s got a complying lifetime pension and has $1.5 million in his account and is worried about how reserves will be taxed in his pension.

“First off, what we can do is forget about the amnesty and just go ahead and convert the whole complying lifetime pension to a market-linked pension. I can do that with no tax on reserves, and that’s a law we have today; in fact, John could do this today if he wanted,” she explained.

“I know that if I do that in John’s case, he’s going to be fine, he won’t have an excess in his transfer balance account because the neat thing about complying lifetime pensions is that when you switch them off, the debit you get is exactly the same as the credit you got in 2017.

“This means they completely reverse each other out, and John, therefore, assuming he has no other super, will just have $1.5 million in his transfer balance account.

“Then what he might do is at some later time when the amnesty has been legislated, use the amnesty to stop his market-linked pension at that time and start a new account-based pension. What John would effectively go through is a two-step process to use the amnesty and avoid the reserves sting.”

The agenda for Day 2

Day 2 of the SMSF Adviser virtual strategy day will kick off with IOOF TechConnect technical services manager Julie Steed, who will provide key insights to navigate the changing contributions landscape for SMSF clients and develop new strategies to maximise super contributions.

This will be followed by a session from partner Accurium that will provide practical tips to help SMSF practitioners claim ECPI for their clients.

The day will end with a session from Cooper Grace Ward partners Scott Hay-Bartlem and Clinton Jackson, who will provide critical insights into estate and succession planning for SMSFs.

More than 1,400 delegates have registered so far for the virtual strategy day with registrations open until Friday 9am.