Starting a pension with Re-contribution

Hi everybody,

My wife and I have an SMSF and as she has just turned 55 and is no longer employed, she wants to start an Account Based Pension (not a TRIP).
At the same time she wants to do a Re-contribution. The taxable component of the Lump Sum Withdrawal will be just below the Low Rate Cap (which is currently $175k). We know that the Lump Sum has to be withdrawn from her Super bank account, deposited in her personal account, then immediately put back in her Super account prior to starting the pension. The money is currently all in her term Deposit maturing shortly, so we'd like to do this at maturity. We already have Segregated Assets because I'm over 60 and our SMSF was initially set up with me retired.

So I hope someone can tell us what is the complete list of paperwork to achieve these tasks? And do the tasks have to be done in any particular order?

All help much appreciated.
Regards,
davewa

 

Anybody?

davewa

 

David,

You have the string of transactions correct: money comes out as a lump sum, then re-contributed as a non-concessional contribution. A new account based pension is then commenced.

I would ensure the following documentation is completed:

1. Declaration of retirement by the member
2. Letter from member to trustee(s) requesting a lump sum payment
3. Trustee minute confirming the member has met the condition of release being permanent retirement (with no intention of returning to work) and payment of the lump sum as per the members request
4. A PAYG payment summary - superannuation lump sum - ATO form NAT 70947 ~ your accountant should prepare this when completing the SMSF annual return
5. Trustee minute for the non-concessional contribution back into the fund
6. Pension commencement documents including: member request to the trustee for a new pension to be commenced (including date, amount, components) + trustee minute confirming acceptance of the members request for a new pension + trustee letter / confirmation back to the member confirming pension will be commenced + details of the pension for the year including a pro-rata minimum pension required for the financial year

There are a number of other considerations including ensuring the assets of the fund (or the segregated assets of the fund) have been correctly revalued prior to the lump sum payment being made and also ensuring the the condition of release has truly been met - i.e. there is NO INTENTION of returning to work.

It is also important that the pension is commenced IMMEDIATELY otherwise any income / increase in value between when the contribution goes in as 100% tax free non-concessional amount and when the pension starts will form a taxable component of the members interest and 'taint' those juicy tax free amounts with nasty taxable parts.

You should also seek independent advice from your accountant or financial planner on the above. Please note your accountant cannot specifically tell you what to do in terms of actual lump sum and contribution amounts unless they hold an AFSL or they are an authorised rep of an AFSL, however if you run the scenario past them they can confirm the taxation implications.

Does that make sense?

SM

 

Thanks for your detailed reply SM,

One thing you said I'm not clear about though - you say "it's important that the pension is commenced immediately". Do you mean the first pension payment is made immediately, or just that the paperwork you describe be all completed and the PAYG Witholding be registered with the ATO?

The reason I ask is because we've recently done the Recontribution and done the Pension paperwork, but were planning to pay the pension annually in January when the new term deposit matures.

Otherwise we've already followed the steps you outlined. Thanks once again.

Regards,
Davewa

 

Hi Dave

Good question. Sorry for not a explaining in plain English.

Pension starts when the appropriate pension commencement documentation is signed - the actual withdrawal of pension payments can come later so long as the minimum pension for the year is met.

By the way, under the (draft) pension ruling released by the ATO, if the minimum pension requirement is not met, or too much pension is taken where a 10% maximum applies (transition to retirement pension) the pension has deemed to either never be started (if started during that year) or to be stopped at the start of the financial year - meaning the tax exemption stops with it!

TR 2011/D3 - Income tax: when a superannuation income stream commences and ceases (As at 13 July 2011)

This is why I try to educate my clients to take a monthly pension payment and adjust it when / if they commence a new pension with additional contributions.

SM

 

Thanks Superman - your replies have been very helpful.
Davewa