New pension management strategies post 1 July 2017

Paying BenefitsSMSF InsightsUnderstanding SMSFs

New pension management strategies post 1 July 2017

This Insight Paper summarises the impact of the introduction of the transfer balance cap regime on SMSF pension strategies from 1 July 2017

In particular, a distinction is drawn between segregation of assets to calculate exempt current pension income for taxation purposes and segregation of assets undertaken by SMSF members for other purposes.

The transfer balance cap regime at a glance

The introduction of a cap on the amount of capital that can be made available to support an individual’s pension liabilities has significantly changed the way you need to look at the day-to-day management of your SMSF. How much of a change will depend on the decisions you make around the management of the new transfer balance cap and the individual member accounts within your SMSF.

You should also remember that the new regime only limits pension accounts and does not apply to a member’s accumulation interests in an SMSF.

Of particular relevance here is that both the commencement of a pension by a member themselves or the automatic receipt of a reversionary pension following the death of a spouse will result in a credit against the recipient’s transfer balance account (TBA). A member’s TBA should not exceed the relevant transfer balance cap (TBC) currently $1.6 million, in order to avoid the application of a penalty regime.

Equally, the commutation, or cashing in, of the whole or part of a pension results in a debit to the TBA of a member, equivalent to the value of the capital removed from supporting an income stream.

Importantly, increases in pension accounts of a member is due to the derivation of income or capital growth in the value of the assets allocated to meet the pension liabilities are not treated as a credit to the TBA of the member. In other words, you won’t be penalised under this regime for good investment performance.

On the other hand, a pension payment made to a pensioner member is not a debit to the TBA either.

Changing the way SMSFs pay pensions


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