Recontribution Strategy for retired SMSF member

Hi all,

I'm 62, retired and just have one SMSF Pension Account (no Accumulation Account). Funds 100% in cash.

I want to invoke a "Recontribution Strategy" - ie withdraw part of the funds as a pension payment to my personal account and immediately recontribute it as a non-concessional contribution so that I can reduce the taxable component. I have read I must first open an Accumulation Account so that I can place the non-concessional contribution there.

Questions -
1. Can I then immediately transfer the funds from the Accumulation Account to the Pension Account and then close down the Accumulation Account? Ideally I would like to achieve all of the above in one day.

2. Does this require me to stop and re-start my Pension fund?

3. Are there any significant difficulties? eg at annual tax reporting time. Will it require an Actuarial Certificate?

4. So I hope someone can tell us what is the complete list of paperwork to achieve this recontribution?

From the beginning all funds in our 2 member account were segregated (my wife was initially still under 55 and still in Accumulation mode) and my wife's funds remain segregated from mine.

Thanks in advance
Davewa

 

Hi David,

Firstly you need to ensure that you do not exceed your non-concessional contributions cap.

Secondly you need to ensure all paperwork is correct and accurate.

Answers to your questions as follows:

1. Can I then immediately transfer the funds from the Accumulation Account to the Pension Account and then close down the Accumulation Account? Ideally I would like to achieve all of the above in one day.

Yes. Firstly you need to ensure you have an up to date balance of your pension account so you know the amount you can take out. Again remember your non-concessional cap.

You can deposit and commence a pension on the same day. There is some debate about whether 1 days worth of income (if applicable) should be allocated to the accumulation account (the income allocation would be taxable) - but my opinion (and other SMSF advisers and auditors) is that provided the paperwork is correct the contribution and pension commencement can start on the same day.

2. Does this require me to stop and re-start my Pension fund?

Yes. That is the whole idea. The original pension that had some taxable component is stopped, and a new one which is 100% tax free is commenced.

3. Are there any significant difficulties? eg at annual tax reporting time. Will it require an Actuarial Certificate?

Yes. The paperwork needs to be right otherwise you are wasting your time. If your accountant / administrator is only looking at your SMSF once a year they are doing you a disservice. If your fund is truly segregated, then an actuarial certificate will not be needed.

4. So I hope someone can tell us what is the complete list of paperwork to achieve this recontribution?

I have probably forgotten something, but I would ensure the following documents are done:

• Ensure you have accurate documentation of the commencement documentation of the pension you are stopping
• Ensure that minimum pension drawdwon made (3%) prior to commuting
• Pension commutation documentation including a request from a member, confirmation response from the trustee and trustee minute of the commutation
• Trustee minute for acceptance of non-concessional contribution
• Pension commencement documentation including member request for pension commencement, trustee response letter, trustee minute
• Confirmation of pro-rata minimum pension required from between the commencement date and 30 June 2013 (if you start the new pension in the month of June there is no requirement to draw anything prior to 30 June 2013)
• Updated investment strategy document - I am assuming you won't keep all the money in cash?

I hope the above makes sense. I implement these strategies for clients on a regular basis, and they can be tricky if not done correctly.

The devil is in the detail, so I recommend you seek paid, competent and specialist advice.

All the best.

SM

 

Davewa,

Sounds complex with adverse consequences if you make a mistake. You should seek professional help from a guy like Superman.

 

Recontribution

Thanks for your detailed reply Superman - much appreciated

Stopping and starting a pension does seem more complicated than I realized. I had hoped to do all the paperwork myself, but it now seems unlikely that I can do it by myself.

The amount I wish to recontribute is well under the non-concessional contribution cap (3 years worth = $450,000)

Cash option has served us reasonably well since before GFC, especially for us risk-adverse retirees. Share market still looks like lots of downside risk.

Finding a competent specialist (preferably where I now live -Sydney) I have found to be not so easy. I had a competent accountant set it up for us in Perth, but he then retired on me. Then I had two accountants with poor competence (one Perth, then Melbourne), and now we've moved to Sydney and our new accountant is not reliable, although he knows quite a lot. How does one find a good accountant? They all claimed to be good. A lot of accountants do just 1 or 2 SMSFs per year (ATO figures)

Regards,
Davewa

 

Hi Dave,

Yes - you make a good point. Many accountants only lodge the return for their own SMSF - which does skew the figures a little. It is difficult for an individual or business to specialise in SMSFs unless they have significant scale.

In regards to speaking to a decent accountant, I would give Alison Kerrigan of Superfund Partners a call on 1300 889 282. If you would prefer to meet someone in person in Sydney please send me a message / email and I will provide you with an appropriate referral based on location and needs.

All the best.
Kris