SMSFs have been warned against rushed decisions to withdraw super where a reversionary pension pushes them above the $1.6 million cap, as there will be strategies for retaining this money in the system, according to Perpetual.
Speaking to SMSF Adviser, Perpetual senior manager of strategic advice Colin Lewis said from July next year when the $1.6 million transfer cap comes into play, reversionary pensions will automatically be added to a member’s account and counted towards the transfer balance cap.
Where SMSF trustees already have $1.6 million in the pension phase, or close to the $1.6 million and have already used all or most of their cap, they can’t put any more into the pension phase.
“All of a sudden, let’s say your partner or spouse dies and they’ve got a reversionary income stream to you. What happens there is that reversionary income stream will be added to your $1.6 million and because you’ve already capped yours out, you’ll have an excessive arrangement,” explained Mr Lewis.
While SMSF practitioners and SMSF trustees may feel they have to pull that reversionary income stream out of the system in these circumstances, Mr Lewis said this may not be necessary.
“If we commute [the trustees’] own existing pension back to the accumulation phase then they can take that reversionary income stream and keep their money in the super system. Whereas if they hadn’t done that it would have had to be pull out of the system,” said Mr Lewis.
“If you don’t commute back your pension and you’re already at your cap, then anything that comes to you will then have to be pulled out. [Alternatively] if you do a bit of manipulation with your own monies then maybe you can keep more in the super system.”
Mr Lewis warned that once trustees make the decision to withdraw the excess from the system they will never be able to get that back in, whereas they’ve always got the ability to withdraw it from the accumulation component, if they’re in the pension phase.
“It is things like that that people need to be conscious of. What practitioners will need to weigh up is whether the tax rate will be better or lower than what the client would be paying tax on outside of super. It’s a case of well do I want it back in the accumulation phase or do I want it pulled out of super?” said Mr Lewis
“If you’re 65 and above and you’ve qualified for the senior Australian pension’s tax offset, your effective tax-free threshold is $32,000, which means you can generate a bit of income outside and not pay any tax. It all comes down to what your personal circumstances are.”
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