Q: I am currently 59, semi-retired, and am the sole director of the Corporate Trustee of my SMSF with a balance of around $850,000 in shares and cash. I have been receiving a reversionary pension since my husband died. I am finding the paperwork required to maintain my SMSF is a little overwhelming. I have been told when I turn 60 next year (August) I could cancel the reversionary pension, rollover a lump sum from the SMSF to an Industry Super Fund, then draw an allocated pension until my preservation age of 67, and wind-up my SMSF. Subject to no rule changes between now and then, do you see a flaw with this plan?
A: Before I make any comments on this particular query, I’ve got to say, Janelle, I think you’re best off getting specific personal advice on this particular issue. The question you’re asking here has a lot of personal information that could affect the outcomes. So, the comments that I will make now are pretty much general in nature. What I want to do is go through a summary of the key issues I feel that you need to cover off, and probably by seeking some advice if you think it’s necessary. So please, what I suppose I’m saying is I can’t give you specific advice, but I can take you through what I believe are the key issues.
So first of all, check your SMSF trust deed and check the existing paperwork in place for the reversionary pension that you are in receipt of. You need to check both those documents, the trust deed and the pension paperwork to see if there’s any fund or any pension specific rules that need to be followed. Some estate planning professionals, if they were involved in setting this up for you, they put in place specific rules that need to be adhered to.
Some of the lawyers that I’ve worked with in the past for some clients have particular pension rules. For instance, you can’t commute a pension until an event occurs. I’m not saying you have that. You just need to check the pension documents and trust deed documents for any fund or pension specific rules that we have to follow.
Second of all, you can stop, you can commute (so cease) a reversionary pension. But once you do that, the entire balance of that pension needs to leave the superannuation environment. A reversionary pension is essentially a pension payable on the death of a member who was already in pension phase. For example, say I take a pension from my fund and when I set up that pension, I nominated my wife to be my reversionary beneficiary. So, on my death, my pension continues to be paid to my nominated reversionary beneficiary, my spouse.
Now, if my spouse decides she no longer wants that pension, remember, it’s still a death benefit. So, death benefits can’t stay inside the accumulation account of my spouse / my dependent there. She can stop my pension so long as she either withdraws that amount out of super and puts it in her own name, or if she stops the pension, rolls it over to another fund where she immediately starts a new pension in the new fund.
So, I just want to be clear here. You are allowed – deed permitting and pension paperwork permitting – to commute or stop a reversionary pension, so long as you either roll it over to another fund and start a new pension or you take it out of the superannuation environment.
Now, you’ve mentioned in your question that you’re waiting to age 60 through that. I’m not aware of any restriction for doing this prior to age 60. And look, why I say that is I know you’re saying you’re currently 59 and you’re 60 next year in August. Look, it may be that you get some advice around if you want to do that before age 60. You’re not taking the money that is yours. It’s a reversionary pension. It’s a death benefit of your spouse. You are allowed access to those money. So age 60 may not necessarily be the issue that we’re referring to here.
The last point I make is in your question, you said you have a preservation age of 67. The maximum preservation age (based on current rules) is actually age 60. So, you can’t have a preservation age of 67. That might be what could be causing you some confusion.
And if that is the case, remember that you can do things that you’re looking to do, and you can maybe even do it sooner than you expect. Just go off and get some advice around the pros and cons of that, and whether there’s anything within your existing fund that may restrict it. I hope that helps. That question that you sent through is quite specific to your position, but hopefully that does give you some idea on what you can and can’t do.
When it comes to the last point around winding up your SMSF, that can be a little bit daunting. I always recommend the involvement of a professional. When doing that, have a look at our guides, How to wind up an SMSF? and the second article, a little bit older, but still relevant, Had enough of your SMSF, what are your options?
That might give you some more detail around the wind up process. I hope that helps with your question.