As we roll into the festive season, well at least the supermarkets are (I’ve already had my fill of fruit mince pies!), it’s time to review SMSFs that have defined benefit pensions, particularly for those that are asset test exempt for Centrelink purposes. These pensions have an upcoming reporting deadline and missing the deadline can mean permanent loss of social security benefits.
Actuarial requirements for defined benefit pensions
Practitioners who have clients with defined benefit pensions will be aware that these funds require an annual adequacy statement from an actuary. This provides the actuary’s opinion on whether there are sufficient assets supporting the pension to meet the benefit obligations. Accurium’s defined benefit pension reports include both an adequacy opinion and the tax-exempt percentage required to calculate the fund’s exempt current pension income (ECPI).
The trustee of an SMSF with a defined benefit pension paid to at least one member is required to perform an annual actuarial investigation under SIS Regulation 9.29A. The SIS Regulation 9.30 requires the actuarial valuation to be performed within 12 months of the valuation date.
The actuarial investigation and valuation is an opinion stating whether, in the actuary’s opinion, there are sufficient assets on ‘average’ (Best Estimate basis – 50% probability) backing the defined benefit pension to meet all future liabilities.
Additional requirements for assets test exempt defined benefit pensions
Centrelink requires all actuarial certificates for SMSFs with complying defined benefit pensions that are asset test exempt to be completed and signed by an actuary on or before 29 December each year and submitted to Centrelink on or before 19 January each year. Missing the deadlines may lead to members losing their Asset Test exemption on their defined benefit pension assets that may reduce their Centrelink benefits.
This is known as a ‘High Probability’ adequacy opinion. This is a more conservative adequacy level, determining whether there is a 70% likelihood that there are sufficient monies to meet all future liabilities. Funds with defined benefit pensions are required to meet the requirement each year in order to retain the asset test exemption.
Now is the time to organise the actuarial certificate
Accurium provides defined benefit adequacy actuarial certificates to accountants and SMSF practitioners to assess the solvency of their clients’ SMSF and provide an opinion on whether the assets are adequate to meet the high probability test. The report includes a Section 295-390 certificate of income tax exemption for the previous financial year.
The cost of a defined benefit actuarial certificate is $390 + GST and the current first response time is 1 business day.
Opportunity to review options for defined benefit pensions
Preparation of annual financial statements and obtaining the actuarial solvency and tax certificate is also an opportunity to review the options for an SMSF member with a defined benefit pension, particularly the potential estate and tax consequences where the member with a DB pension dies. To remove these risks prior to any potential legacy pension exit measure, which may or may not eventuate, consideration should be given to restructuring the defined benefit (DB) pension to a pension for which any capital remaining upon the member’s death can be dealt with, similar to a market linked or account-based pension, that is, paid to a dependent or estate.
For more information on the estate and tax implications for a member who dies with a defined benefit pension in place and the options available to restructure prior to their death, read the article ‘Dealing with legacy pensions – do you have time to wait for the 2-year exit measure?‘.
Accurium can also provide written advice on the restructuring option available to an SMSF member with a legacy pension. Please contact us with any questions concerning SMSFs with these legacy pensions.