In a recent online article, Accurium head of education Mark Ellem explained that it is now time to review SMSFs that have defined benefit pensions — particularly for those that are exempt from Centrelink’s asset test.
“These pensions have an upcoming reporting deadline and missing the deadline can mean permanent loss of social security benefits,” Mr Ellem said ahead of an upcoming webinar on legacy pensions.
Mr Ellem said that practitioners with defined benefit pensions would be aware that these funds require an annual adequacy statement from an actuary.
“This provides the actuary’s opinion on whether there are sufficient assets supporting the pension to meet the benefit obligations.”
These defined benefit reports include both an adequacy opinion and the tax-exempt percentage required to calculate the fund’s exempt current pension income (ECPI), he said.
Mr Ellem noted that the trustee of an SMSF with a defined benefit pension paid to at least one member is required to perform an annual actuarial investigation under SIS Regulation 9.29A.
“The SIS Regulation 9.30 requires the actuarial valuation to be performed within 12 months of the valuation date,” he explained.
“The actuarial investigation and valuation is an opinion stating whether, in the actuary’s opinion, there are sufficient assets on ‘average’ (Best Estimate basis — 50% probability) backing the defined benefit pension to meet all future liabilities.”
For defined benefit pensions that are asset test exempt for Centrelink purposes, there are additional requirements, he said.
“Centrelink requires all actuarial certificates for SMSFs with complying defined benefit pensions that are asset test exempt to be completed and signed by an actuary on or before 29 December each year and submitted to Centrelink on or before 19 January each year.”
“Missing the deadlines may lead to members losing their asset test exemption on their defined benefit pension assets that may reduce their Centrelink benefits.”
These pensions require a ‘high probability’ adequacy opinion, said Mr Ellem.
“This is a more conservative adequacy level, determining whether there is a 70 per cent likelihood that there are sufficient monies to meet all future liabilities. Funds with defined benefit pensions are required to meet the requirement each year in order to retain the asset test exemption.”
The preparation of annual financial statements and obtaining the actuarial solvency and tax certificate, Mr Ellem said, is also a good opportunity to review the options for an SMSF member with a defined benefit pension, particularly the potential estate and tax consequences where the member with a defined benefit pension dies.
“To remove these risks prior to any potential legacy pension exit measure, which may or may not eventuate, consideration should be given to restructuring the defined benefit pension to a pension for which any capital remaining upon the member’s death can be dealt with, similar to a market linked or account-based pension, that is, paid to a dependent or estate,” he stated.
