Industry experts are continuing to see SMSFs with defined benefit pensions despite the fact new members have been unable to start one since 1 January 2006, an SMSF conference was told today.
SuperConcepts SMSF technical services executive manager Mark Ellem told delegates at the SMSF Association National Conference 2019 in Melbourne that as an administrator of SMSFs, his firm regularly encounters funds with defined benefit pension arrangements.
“Given that for an SMSF the cut-off date for starting a new defined benefit pension was back on 31 December 2005, given the time that’s elapsed, we’ve either got the pensions expiring or the members expiring,” Ellem said.
“And we have to deal with what’s left over.”
He added it is vital to deal with these pensions before the end of the term or the end of the life of the individual in order to avoid negative tax outcomes.
Accurium general manager Doug McBirnie pointed out defined benefit pension payments are predefined and must be paid every year, and the pension payments are not linked to investment performance.
“So if the returns are lower than expected and the assets aren’t sufficient, there’s usually a guarantor in the line to top up the amount needed to meet the clients’ needs,” McBirnie said.
Furthermore, other than the promised pension payments, the pensioner has no rights to the assets supporting the defined benefit pension, he noted.
Also, not all assets supporting the defined benefit pension earn tax-free income, he pointed out.
“So in that context it does seem odd that you’re allowed to start with these in an SMSF. But that’s what we have,” he said, adding these arrangements can lead to problems for SMSF trustees.
Existing defined benefit pensions can be categorised as complying lifetime or complying life expectancy (fixed-term) defined benefit pensions, or commutable defined benefit pensions (flexi-pensions), under which they can be either commutable lifetime or commutable life expectancy (fixed-term) pensions.
By Malavika Santhebennur
Self Managed Super
21 February 2019