Many of you have clients with Defined Benefit Pensions. These pensions were all created prior to 2007. While most of these pensions have ceased, I estimate that there are still around 1,000 in place within SMSFs.
I am seeing a lot of SMSF trustees with these pensions being proactive and converting them to Market Linked Pensions. There are generally 3 reasons for this:
1. Upon a member’s death, the balance in the Defined Benefit Pension is automatically transferred into a reserve. It can be difficult to get the reserve out of the fund in a tax effective way. In contrast, balances in a Market Linked Pension can be paid out to beneficiaries upon death.
2. While the member remains alive, income related to any surplus in the Defined Benefit Account (ie difference between the assets and best estimate of the liabilities) is not tax exempt. By moving to a Market Linked Pension, the income will become exempt.
3. Defined Benefit Pensions are complex to administer.
However, there may be adverse social security implications arising from converting Defined Benefits Pensions to Market Linked Pensions. And there may also be Transfer Balance Cap consequences. Your clients should obtain financial advice before making any changes.
THIS ARTICLE WAS CORRECT AT THE TIME OF WRITING. SMSF RULES CHANGE OVER TIME AND THE ARTICLE MAY BE LESS RELEVANT IN THE FUTURE.
Greg Einfeld has over 20 years’ experience in the Australian Superannuation and Financial Services industry. He has MEc and MBA degrees, is a licensed financial adviser, a qualified actuary, and specialises in Self Managed Super Funds (SMSF’s). He regularly presents on a variety of SMSF topics including investment, tax, estate planning, pensions, administration and strategies.