Updating an SMSF deed after a pension
SMSF trustees still need to be conscious of changes to superannuation law and to the structure and circumstances of an SMSF even after a pension has been started. If necessary, the trustee should update the SMSF deed to ensure ongoing compliance. This is because:
- the member in 'pension phase' may receive future contributions whether they are employer contributions or other contributions (such as death benefits from other members). Those additional benefits cannot be added to the member's pension account and so will need to be credited to the member's accumulation account in accordance with the superannuation law and the provisions in the SMSF deed.
- the member in 'pension phase' may still have benefits in the SMSF that are not supporting the pension — those benefits will be in the member's accumulation account; or
- other members may still have an accumulation account;
What to do when updating a fund with a pension
Ideally:
- pension arrangements will be clearly documented — for example, in a pension agreement between the SMSF member and the trustee(s).
- those documents clearly set out the rules in relation to the payment of the pension.
In those circumstances, updating the SMSF's deed will not affect the pension being paid.
If the SMSF is paying an older form of pension, most particularly a defined benefit pension, then advice should be sought about whether the update will affect the existing pension.
Why would the deed need updating?
Here are some examples why the trustee(s) of an SMSF with a member in pension phase may want to update the deed:
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The deed may have been prepared before the changes to pension laws in 2007. If any member has benefits that are in an accumulation account, then those benefits will need to be cashed at some point. Generally, benefits are only paid out:
- — in the form of a pension, in which case the deed should contain the current pension provisions;
- — as a lump-up, in which case the deed needs to clearly permit this1 ; or
- — as a death benefit, in which case the deed should contain clear rules about how death benefits are to be paid and should, preferably, permit members to give binding directions to the trustee.
- New members may join the fund, for example, the children of the current members. This could make it easier to distribute death benefits later on. In this circumstance, the trustee will need to provide the new member with an up to date product disclosure statement. The new member would expect that the deed will not restrict any investments that they would otherwise be able to make under superannuation law. An old deed may contain those sort of restrictions.
- A member in pension phase may wish to enter into a death benefit agreement (see our earlier article on this — click here) as a means of ensuring that the trustee pays the balance of the member's benefit in accordance with that member's wishes.
When don't SMSF deeds need updating?
SMSFs that are paying defined benefit pensions should only be updated with extreme caution and only on the advice and with the assistance of a lawyer.
Likewise an SMSF trustee may not feel that an update is required:
- when all members have satisfactory pension arrangements;
- arrangements are in place for the payment of death benefits that are not likely to require changing; and
- it is unlikely that the members will receive any further contributions (for example, the members will not meet the age/employment requirements in respect of contributions).
More information
For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks Superannuation Team.
1Some SMSF deeds do not expressly permit the payment of lump sums if the SMSFs trustees are individuals. These deeds should be updated as the ATO's view about whether SMSFs with individual trustees can pay lump sums has changed over time. Now, an SMSF with individual trustees can pay a lump sum provided both the deed allows it, and the SMSFs purpose, being for payment of pensions, does not change.