SuperConcepts’ Graeme Colley says the process of determining which pension should be commuted for clients who have more than $1.6 million in pension phase is causing confusion for SMSF practitioners.
“I think some SMSF practitioners are not fully appreciating which pensions they need to commute in full or in part for estate planning purposes,” Mr Colley said.
“The portion which has the highest tax-free component should remain in pension phase, and the pension with the highest taxable portion should be transferred over to the accumulation phase to get it down to the $1.6 million.”
The sole reason for doing that, he said, is for estate planning purposes.
“So when children who are older than 18 ended up as the recipients of that benefit it would be tax free to the extent of the proportion that’s tax free.”
Such an oversimplified answer.
The academic answer is to keep the tax free % pension going if investment earnings will outweigh the minimum drawdown, and reverse if the drawdown rate exceeds the investment return. Of course no-one knows what the investment returns should be. Differing client circumstances, including investment mix and estimates of returns, means its not one answer for all.
Anonymous is correct (it depends on client circumstances), you would not always choose the highest tax free components for pension. For example say the member is over 85 years of age then your min drawdown is 9% which will erode the benefit rather more quickly than if you were 60 (4%), plus your likelihood of death is also increased just due to your age. As a consequence it may suit your estate planning objectives to draw down the high taxable component portion of your benefit as pension and leave the high tax free amounts in accumulation.
Provided the member is over 60, shouldn’t the aim be for the members to maximise their tax free balances in the Fund? Therefore keeping the pension with the highest taxable proportion as opposed to the highest tax-free? Surely this would provide flexibility in the future if the death benefit has to be paid to a non-tax dependant if there are no longer any tax dependants.
I would love to know how Graeme arrives at this “should” position. Surely each clients circumstances MUST be looked at.
And what happens to the accumulation account, don’t the over 18 children get that too ? And pay the same tax regardless of pension or accumulation ?
Depends on the tax components of the benefits.
Do you mean the pension with the highest tax free % component or with the highest tax free dollar amount component?
I think it all depends on if there will be lump sum commutations from super. If this is very unlikely and you are drawing minimum from pension would it not be best to have all tax free component in the pension account?