Issue: 18
Sent: 14-11-2005 00:16:27
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What to do when starting an allocated pension - Tony Negline
Statistics show that by far the most popular way of maintaining an income in retirement is by allocated pensions.
For members of self-managed super funds (SMSF) it's important to know how to set them up properly and avoid getting into trouble.
More than 90 per cent of all pensions started in SMSFs are allocated pensions. About 15 per cent of the 500,000 members (75,000 people) in SMSFs are aged over 60 and many of them are probably receiving pensions.
With an average account balance across all SMSF members of about $260,000, this means about $19.5billion of SMSF assets is invested in pension type products. Before trustees and their administrators begin paying a pension they must ensure that a lot of details are addressed.
The place to start, as with all superannuation issues, is the trust deed. This document will tell the trustees what type of income streams their fund can pay and what rules they must follow when paying that pension. The deed should also tell the trustees what flexibility they have in determining how to pay and administer the pension, including how the funds can be invested.
The trustees should also take a look at the super laws that apply to make sure none of these rules is violated.
Following the super laws is the only way trustees can be sure their fund receives tax concessions (assuming that trustees want to receive these) and they avoid being fined, banned from acting as trustees or, in rare circumstances, put in jail.
What would trustees do if their deed requires a course of action that the super laws prohibit?
This type of disparity happens very frequently and there is only one way to solve the problem. Trustees should not breach either and must amend their deed with the help of a suitably qualified professional. Before a trustee pays any pension, it is important to understand some terminology. The super industry calls the date a pension begins as the "commencement date". The commencement date is not the "date of first payment".
A pension's commencement date is the date a trustee (often in conjunction with the member, his or her advisers and the fund's advisers) decides that the pension will be paid. It is this day that a trustee will transfer the assets used to purchase the pension from the accumulation part of the fund and move assets into the pension part of the fund.
This is much more than a bookkeeping exercise. A trustee might change the way assets are invested. The income and capital gains earned on these assets go from being taxed at 15 per cent to being taxed at 0 per cent. Some tax and Centrelink matters are decided on this date. A pension's date of first payment is just that, the date that the trustee (again often with the assistance of the member and advisers) decides that the fund actually makes a pension's first payment.
Any pension that is started by a fund must be reported to the Australian Taxation Office for reasonable benefit limit (RBL) purposes. These reports must be sent to the ATO within the first 14 days of the month following a pension's commencement date.
If a pension is partially or fully returned to being a lump sum or is rolled over to a new pension then this must be reported to the ATO for RBL purposes (within the first 14-day limit).
SMSFs are notorious for failing to report benefits to the ATO. Before a pension commences, the trustee should detail the structure of the pension in various minutes. For all new pensions paid, the trustee probably needs to issue a Product Disclosure Statement to the member, detailing all relevant facts about the pension to be paid so the member can make an informed decision on whether they really want to ``purchase'' this type of product.
If an allocated pension is being paid and the trustee wants to give the member control over how much income is paid (within the minimum and maximum limits determined by the super laws) the trustee needs to make sure that relevant paper-work between the fund and the member actually takes place every year.
If the trustee is paying the new market-linked term pension (sometimes called a term allocated pension) and the member chooses the term then this choice needs to be in writing.
At least one income payment must be made from every pension each year. If an annual income payment is not made the benefit will not be a pension. Trustees must make sure that pay-as-you-go tax is withheld, less any 15 per cent rebate from each income payment. Any net tax kept by the trustee must be forwarded in the appropriate time to the ATO. The net of tax payments must be deposited to the member's account or to an account specifically nominated, in writing, by the member.
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This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.
