Addressing SMSF Adviser’s recent SMSF Summit 2019 in Perth, CFS executive manager Craig Day said the new rules, which allowed fund members to access unused concessional contribution balances up to five years ago, could be used to reduce sometimes large reserves of assets stuck in defined benefit pensions for older clients.
“If the client’s got no other concessional contributions, you can allocate up to the cap, which is currently $25,000, but the interesting thing about the concessional catch-up rules is you get those rules regardless,” Mr Day said.
“If a client hasn’t worked for 20 years, what level of salary sacrifice and SG contributions has he got? Zero. So, all these clients are accumulating unused concessional cap amounts of $25,000 a year and a client’s concessional cap may be up to $100,000.”
Mr Day said CFS was receiving an increasing number of calls from advisers who were concerned about what to do with clients that were advancing in age and had large amounts of assets locked up in defined benefit pensions.
“If your clients did commence one of these fixed term defined benefit pensions, they could only be one of two types: a lifetime, and the people are dying; or a life expectancy, and you’re getting to the end of the term,” he said.
“The ATO has told us that if the person dies or the term comes to an end, the assets backing that pension don’t belong to that member, they simply fall into a reserve. If you want to get that back to the members, you’ve got to allocate it out of the reserve back to members’ accounts, and if it goes above 5 per cent, you have an amount counting towards the concessional cap.”
Mr Day said for some defined benefit pension types, part of the pension could be commuted into a term allocated pension without counting as a contribution.
“There’s a strategy that simply involves rolling over to commence a complying term allocated pension, and if you do that, the allocation will not count towards the concessional cap, but there are some catches here,” he said.
“If you’ve got one of the non-complying defined benefit pensions or a complying life expectancy, the commutation value is limited — it might give you $100,000, but the amount of assets you’ve got sitting on reserve is $200,000, so you can only allocate $100,000 that doesn’t count towards the caps.
“With the lifetime pensions, there is no commutation and that can make a massive difference.”
Good points.
But a word of caution that we need TSB to be below $500,000 at the end of the previous FY. If we are talking about lifetime pensions, a payment rate of $31,250 annualised on 30 June 2017 would mean that TSB exceeds $500K and therefore the person would be ineligible for the catch up concessional contribution provisions.