SMSF pensions: Planning your pension properly

Tim Miller from SuperGuardian discusses the most important considerations when planning a pension, potential traps to look out for, and what often can be overlooked.

Transcript

What is a pension planning toolkit, and how can it assist SMSF trustees?

The concept behind the pension planning toolkit is to really appreciate that when we look at setting up a pension in a self-managed superannuation fund, that we need to understand that there’s all these additional tools available to us to think about to ensure that we actually get the right pension in place. Because in a self managed fund, we’ve only really got one type of pension. But there are multiple options that we can do with regards to whether it’s reversionary or non-reversionary.

So whether it automatically goes to someone on death or otherwise, whether we set up one pension or two or three, because that can have estate planning ramifications. The idea of the pension planning toolkit is to work your way through a number of sort of strategic questions to ensure you’re getting the best pension available for your own set of circumstances.

In what scenarios might SMSF trustees consider having multiple pensions?

The main scenarios that you see multiple pensions are probably the two that I see, one from an estate planning point of view, in that you might have multiple beneficiaries. And so you deliberately set up a second income stream with potentially tax-free or non-concessional contributions that’s going to be paid out to a non tax dependent so an adult child. So therefore you’re limiting the tax liability for that child.

The other time that we see a little bit of these multiple pensions is because the contribution rules have changed and so you might be making additional contributions to your funds. So instead of stopping a pension and having all the obligations attached with stopping and restarting, you just start a second income stream and pay a new pension from the fund.

Are there any myths about pensions that you would love to dispel?

Probably the main one, I guess, is the concept that setting up a pension is a set-and-forget strategy, and that you just start it and then you pay yourself the annual pension obligation. Yes, we’ve only got one type of pension that we can have in a self managed super fund, forgetting that the old legacy style of pensions, we can only set up an account based pension, but there are all these other elements to it that I think are often overlooked. And so the myth that it’s a real simple sort of straightforward, ‘I’m just starting a pension and I don’t really have to do too much about it’. I think there’s a lot more to what is otherwise a simple concept.

Are there any other areas of pension planning that you think are overlooked by SMSF trustees?

I think there’s probably a number of areas that are overlooked in this area, and I think one of them is, and I often kind of get a bit too passionate when I’m talking about the idea of reversionary pensions versus non-reversionary pensions. And I try to taper myself in this space. But it’s an area that I think is not necessarily understood at the trustee level as to the differences between reversionary and non-reversionary. So I think it’s really important for trustees to understand the difference so that they can appreciate that if you’ve got a reversionary pension in place that there is a liability that continues on past the death of the member. And so you calculate the pension once and you must pay it regardless of whether that person dies on the 1 July or the 30 June. The full minimum that’s calculated must be paid during that year.

Now that’s quite different to a discretion where the trustee decides to continue to pay a new pension. The minimum obligation effectively dies with the deceased member. And so just little nuances like that. And then, of course, the different reporting obligations that go with the transfer balance cap. So it’s quite a significant difference to have one style versus the other. And I think often trustees will overlook that.

Are there any potential traps that SMSF trustees should be aware of when pension planning?

Well, I think probably one of the main traps is, again, I wouldn’t say not complacency around the minimum pension, but particularly we’ve had a 50% relief on the minimum pension. And so one of the traps is that people don’t review their pension payments in a timely enough manner. And that can often lead to if the market has gone up and therefore they’re not drawing enough down, then it can lead to them having a pension shortfall.

And if they don’t recognise that, because they might do their accounts late in the financial year, they don’t do that and then don’t pay the minimum on time, then the pension ceases. And that can be huge from a tax ramification. But all the other planning that they’ve done could be thrown away by failing to recognise that the market has moved and the minimum pension obligation hasn’t been met.

Any other tips for SMSF trustees when pension planning?

Timing is always a critical issue as far as when to start a pension. But one of the things that I tried to address with this toolkit Is that preservation age is really the first key timing event that we look at to start a pension. Even though there’s transition to retirement. So we need to ensure that even though there’s not the same tax benefits attached with transition to retirement as there is an account based pension, It’s the first opportunity we get to start planning for estate planning purposes and potentially putting benefits aside that sit in one category while we make contributions to an accumulation account.

So I think there’s number of little key things to make sure that you’re always reviewing your circumstances to make sure that your pension is best fit for yourself and recognising that it’s not one size fits all when it comes to an account based pension.

Tim Miller is Education Manager at SuperGuardian.

This interview took place at the 2022 SMSF Association conference where SuperGuide were guests of the SMSF Association.