Case study: I can’t move my pension to my SMSF

SMSF technical expert and columnist for The Australian newspaper
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Let’s say you currently receive a pension from a retail super fund and you want to move it into a self-managed super fund, but you’ve hit a significant roadblock. This is quite a common issue, and one that was faced by a listener who called us on Peter Switzer’s The Super Show on 2GB and 3MTR late last year.

Our caller Isabel wasn’t sure what she should do and asked for our thoughts.

The problem

Let’s say the pension account’s balance is worth $400,000 and a small percentage of this – less than 5% – is in an investment that pays an intermittent income, but lump sum withdrawals aren’t allowed from this investment.

The restricted investment is an unlisted Australian Real Estate Investment Trust (AREIT) that had been having liquidity problems for several years. Isabel is permitted to take some of her capital out of the investment once a quarter.

She wants to transfer her pension to an SMSF that she has established with her son, but the retail super fund says they can’t move the account balance because of the restricted investment. How can this problem be solved?

The solution

One way of solving her problems is as follows:

  • Ask the fund to rollover the pension account balance minus the illiquid AREIT investment to her SMSF. Before performing the rollover, the super fund will have to check that at least the pro-rata minimum pension has been paid. If there is any shortfall, it will make sure this income is paid before performing the rollover. The retail super fund will also want confirmation that her SMSF is legitimate – I described this process in this article last year.
  • This will mean that her current retail super pension will be left with a small account balance represented by the AREIT investment balance. Isabel should tell the retail super fund that she wants to commute this pension and move the money back into the accumulation phase. This should not be a problem, but paperwork will have to be completed.
  • Once the money is back in the accumulation phase, Isabel should request lump sum withdrawals when they’re permitted. Our caller is aged over 60, so lump sum and pension income withdrawals from taxed super funds will not be taxed. She could consider these lump sum amounts income or, if possible, contribute them into her SMSF.
  • Once the rollover arrives in her new SMSF she can commence her new Account Based Pension (ABP), which must be documented properly with pension application forms, pension agreements, Product Disclosure Statements, etc.
  • Between the date when the retail super pension ceases and the new SMSF pension commences, Centrelink will treat the super assets as a deemed asset. In other words, if relevant there will be a different income test assessment. Centrelink will use Isabel’s revised life expectancy for its income test for the new pension.

That’s the first part solved.

We now need to turn our attention to parents and children in the same SMSF. In many families, this will produce a very satisfactory outcome. But there are a few issues that investors need to consider before running an SMSF with family members.

Unfortunately, there is an Administrative Appeals Tribunal (AAT) case called Triway Super Fund which was decided last year. Mum, Dad and their drug-addicted son were members of an SMSF and the son either stole or gave away all the money in the SMSF. The Tax Office penalised the super fund trustees including Mum and Dad and the AAT agreed with the ATO. More details about this sad case can be found in When kids and SMSFs go horribly wrong.

In every SMSF it’s essential that all trustees are signatories of the fund’s bank account and nominated as owners of the super fund’s assets. This is not guaranteed to stop all fraud of theft, but it will hopefully stop some.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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