An important part of paying a super pension is the need for various actuarial certificates.
There are actually four different types of actuarial certificates in the super and tax laws and these serve a range of purposes. Most of them are for large super funds or any fund paying a defined benefit pension, which means that most self-managed super funds don’t have to worry about these.
However, once you move into the pension phase, there is one particular actuarial certificate that may be very important for your fund.
Once a super fund begins to pay a pension there is an important decision trustees have to make which has administrative, financial and tax implications. This decision involves the segregation of assets between assets used to pay a pension and non-pension paying assets.
Recently, we described what segregation is and some of the practical issues that arise (read Should I segregate my pension assets [1]).
Segregated vs. Unsegregated
A fund that uses specific assets to pay a pension is said to have ‘segregated pension assets’ and a fund that doesn’t use this approach is said to have ‘unsegregated pension assets’.
If you choose to segregate your pension and non-pension assets and your fund only pays an account-based pension, then you won’t need to worry about obtaining an actuarial certificate each year for income tax exemption purposes.
However, if you choose not to segregate your pension and non-pension assets, then you’ll need to obtain an actuarial certificate each year.
Tax exemption
I think this certificate serves little or no purpose, especially for SMSFs paying account-based pensions. But it doesn’t matter what I or anyone else think because without this certificate your fund can’t claim an income tax exemption for your pension assets.
You apply for the actuarial certificate before the fund’s financial accounts and external audit have been completed because the actuarial certificate in effect tells you the percentage of assets that back a pension and hence the percentage of income and gains that are exempt from tax. It also tells you the period of the financial year to which the certificate applies.
Once a fund is armed with their certificate, the financial accounts, member statements and fund audit can all be completed. The fund auditor should ask to see the certificate.
Exemptions
An often-asked question about actuarial certificates involves super funds that only pay pensions and where the trustees have never formally decided to segregate or not segregate their assets.
If your fund pays pensions for the whole financial year and no contributions are made during that time, then your fund is exempt from having to get an actuarial certificate for income tax exemption purposes.
How much do actuarial certificates cost?
Obviously, the cost of obtaining an actuarial certificate is one important factor to consider if your fund has pension and non-pension assets. In most cases, they should cost less than $500 plus GST.
Segregated pension assets will cost more to administer and to prepare accounts for. You’ll need to speak to your fund administrator about the cost of running segregated assets and compare this with the cost of unsegregated pension assets and the actuarial certificate.
Transition to retirement
If your fund is paying a transition to retirement pension [2], then the issue of asset segregation is a factor you’ll have to consider.
As our recent article pointed out, it’s possible to change from segregated to unsegregated assets without too much hassle. However, before you do, you should get some good advice because not all trust deeds permit this and you will need to make sure that you complete this bundling and unbundling process correctly. You’ll also want to factor in the costs of completing this administration work.
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.
Also in the Switzer Super Report
- Peter Switzer: What I’m doing right now [3]
- George Boubouras: Two stock buys in an outperforming sector [4]
- Paul Rickard: AGL Energy’s new hybrid notes: how they stack up [5]
- Rudi Filapek-Vandyck: The broker wrap: 11 buys and five sells [6]