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Tax and estate planning traps flagged with pension restructures

While the ATO has previously stated that changing a pension to reversionary after it has been commenced is generally fine where the deed allows it, it may be safest to stop and restart the pension, says a technical expert.

 

 

Cooper Partners head of SMSF and succession Jemma Sanderson explained that clients who specifically want a reversionary pension for estate planning purposes but already have a non-reversionary pension may be wondering if they can make it reversionary in situ.

“It really depends on the deed. The ATO has indicated that they suspect that it would be okay if the deed allowed it,” Ms Sanderson told delegates at the SMSF Association Conference last week.

“Now I probably take a more conservative view and would want the original terms and conditions of a particular pension to state that it’s reversionary. So, I would want to stop a pension and restart it.”

Ms Sanderson cautioned that stopping and restarting a pension can have its own issues, particularly if the client has substantial accumulation accounts and multiple pensions in place which were kept quarantined from a tax component perspective.

“You certainly wouldn’t want to muddle the 100 per cent tax-free pension back into accumulation, which is mainly taxable component, to then start a new pension that’s reversionary because you then muddle up those tax components,” she said.

“The tax component quarantining is purely from an estate planning perspective so that the kids don’t pay as much tax.”

Some clients, she said, might be more concerned that their pension is or isn’t reversionary than saving their adult children some tax down the track.

“Everyone is going to be different, and you need to see what their appetite is and exactly what it is they want to achieve before restructuring any of those things,” she said.

Some people have a preference for reversionary pensions, she said, because it gives them 12 months to deal with it before it becomes a transfer balance credit on the reversionary beneficiaries’ own account.

“Over that period of time, you then make the decision about what you do; you can’t roll that reversionary pension back into accumulation for the beneficiary, but they can roll their own pension account into accumulation,” she said.

“So, you can keep as much money in super as possible, which tends to be the intention, but for others it may be to take it out and pay off some debt.”

She said that it is important to note, however, that for non-reversionary pensions, it is still possible to get the 12 months or potentially even longer, because it only needs to be dealt with as soon as practicable.

“From a practical perspective, where we’ve seen reversionary pensions in practice and someone has died, it has been a real pain to get an interim balance at the date of death, rather than dealing with it all at the next 30 June, because the next 30 June makes a lot of sense and you can draft paperwork appropriately to deal with that account at that date,” she said.

“So, the biggest difference between a reversionary account, and a non-reversionary account, is the transfer balance credit that arises in a beneficiary’s transfer balance account.”

If it’s reversionary, then it will be the value at the date of death; if it’s not reversionary, then it’s the value at the date you deal with it, she said.

“There could be a vast difference there. You could have investments that absolutely kill the pig or up substantially go up in value over that 12-month period, but there could also be a detriment, if [it] goes down over that time, so you need to assess that on a person-by-person basis,” she explained.

“Obviously, you’re making a decision about whether a pension account is reversionary when the person starts it, not by the time that they’re passing away. You just need to be really careful about how all of that works.”

 

Miranda Brownlee
25 February 2019
smsfadviser.com

 


Sam El Shammaa

Sam El Shammaa

Director/Financial Planner

For more than 20 years, Sam has been a financial planner helping individuals and families achieve their financial planning goals, by providing advice on Investment Planning; Insurance Planning; Tax Planning; Retirement Planning; and Estate Planning. Working with a network of highly skilled professionals in Sydney he is dedicated to providing high-quality advice and integrated wealth management solutions that simplify and enhance the quality of his clients' lives.

Sam established his own firm in 1997 and has overseen its steady development and growth. Attention to detail, good listening skills and great empathy are symbols of his appreciation by his clients. He has built long-term relationships with his growing client base and aims to provide excellent customer service.

Sam began his financial planning career in 1993 after completing a Bachelor of Science degree in 1991. Since this time he has accumulated many professional qualifications such as:

Sam has volunteered with the Cancer Council of NSW and can be seen almost every year volunteering or participating in the 7 bridges walk.

Away from the business, he enjoys spending weekends with his son. He is also a football (soccer) tragic and is a massive Chelsea FC fan.


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George Pereira

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Having worked for national financial planning companies in the past, George has extensive experience in the provision of advice in risk insurance, investments and retirement planning and is focused on forming long-term relationships with his clients.

George has been awarded a Masters of Commerce (Financial Planning) and a Bachelor of Commerce through University of Western Sydney as well as having the Diploma of Financial Services (Financial Planning).


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Jane entered the financial services industry in 2006, and worked with big blue-chip financial companies such as Count Financial Limited and AMP Financial Planning Pty Ltd.

She holds a Master's degree in Applied Finance through Macquarie University, and she is a member of the Million Dollar Round Table.

Being a self-confessed "tennis nut", Jane spends many weeknights in the tennis court, and is a frequent member of Sydney's Eastern Suburbs Tennis Competition.

Being a highly motivated professional, Jane is always eager to help her clients on a wide range of financial planning needs.

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Financial Planner

Paul has been a financial planner for over 15 years helping individuals and families successfully achieve their financial planning goals. He is very focused on building successful long-term harmonious relationships with his clients.

He provides a holistic approach on various aspects of financial advice encompassing areas such as Investment Planning; Insurance Planning; Tax Planning; Retirement Planning and has extensive experience and knowledge in these fields.

Paul's professional qualifications are:

Away from his professional life, he enjoys spending his time with his family doing various activities such as coaching his son and taking him to games. He is a very avid sports fan and a cricket enthusiast.

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He holds a Master's degree in Commerce specialising in Marketing through the University of New South Wales.

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