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Pension strategy can optimise falling markets

A superannuation specialist has suggested innovative pension strategies can allow SMSF trustees to use the super reform regulations to benefit from falling markets.

Specifically, advisers who implement a stop-loss pension strategy can assist their trustee clients to ultimately maximise their transfer balance cap, I Love SMSF director Grant Abbott said.

Under the current super reforms, an SMSF member cannot assign any further assets in their pension account once they have reached the $1.6 million transfer balance cap. However, an appreciation of pension assets can accumulate infinitely above the $1.6 million limit.

In addition, if pension assets have managed to appreciate in excess of $1.6 million and the pension is then commuted, the transfer balance debits recognised by the ATO will be for the higher dollar value.

This situation means once the higher debit amount has been recorded, an SMSF member at an appropriate time could start a new pension with an asset balance greater than $1.6 million.

“If our client’s pension balance has got from $1.6 million to $2 million, that’s okay because we don’t mind the growth, but if we see the market drop down by 30 per cent, the balance goes down to $1.4 million, but I’m stuck because I can’t put any more in,” Abbott pointed out.

“But if the client’s pension balance is $2 million and there is a stop-loss term on the pension set for when there is a 10 per cent diminution and the pension is then automatically commuted, it will mean $1.8 million will be debited against the client’s transfer balance account.

“It means the client will have a $1.8 million transfer balance account surplus and even if my original pension assets fall to $1.4 million, if there are other assets in the accumulation account, the client has the ability to start a pension valued at $1.8 million.”

According to Abbott, if there was no stop-loss term on the pension, the client would still be in the same financial position in regard to the overall asset value of the SMSF.

“But the smart advisers will now start to think it’s better in a falling market to put a stop-loss in the client’s pension terms and conditions because that will create a debit in the transfer balance account that will enable the client to pull more out of the accumulation phase,” he said.

He noted caution still had to be exercised with this strategy.

“If the client has a tax-free pension, we’ve got to be careful because if the pension is commuted, all of the assets will be washed in with the taxable assets in the accumulation account,” he warned.

“If we’re looking at that strategy, we might want to make sure that all our cash and cash equivalent assets that are not going to go down sit in a tax-free investment strategy.

“So if we implement a stop-loss condition, perhaps it should only apply to the taxable component of the pension. That’s on the assumption the client has accumulation account assets.”

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