Actuarial percentages for pension funds that are winding up

Winding up an SMSF can sometimes be tricky, particularly if a pension is involved. What actuarial percentage should you use? Particularly since your actuary can’t give you a final figure until the end of the year.

This article isn’t about all the dos and don’ts for winding up SMSFs – they will be covered in our special webinar on 5 June (2025 Windups – Tips & Tricks Webinar).

But there is one question we field a lot for clients with pension funds – if I’m winding up the SMSF in (say) May, what actuarial percentage should I use to work out the various member balances I’ll be rolling over or cashing out? In other words, what % of the fund’s investment income should I assume will be treated as exempt from tax when I’m calculating the balances?

The starting point is often the percentage from last year’s certificate. If the fund looks pretty much the same with no major events (eg no new pensions, large contributions, large commutations etc), it’s likely that last year’s certificate is a reasonable predictor of this year’s.

If things have changed a lot, however, you might need an updated estimate from your actuary. But herein lies the challenge – your actuary can’t actually issue a certificate until the end of the year (or the date the fund is officially wound up) but accountants and trustees often need to calculate fund balances earlier in order to roll them out of the fund.

Like most actuaries, Heffron can provide you with an estimate. You can either enter a wind up date in BGL / Class (in which case the software will allow you to submit a request) or provide us with the information separately. The key, though, is to let us know you need an estimate for a wind up rather than the final calculation and certificate. If you don’t, and we issue a certificate thinking the fund has actually been wound up on the date specified (with all balances paid out or rolled over immediately), the certificate won’t be valid.

At the end of the year, or once the fund really has been wound up, you’ll still need to re-submit data for the whole year to get a final percentage (and certificate). That’s the figure that must be used on the fund’s final tax return. But it’s usually fine to work out mid year balances using an estimated actuarial percentage.

Where that logic potentially falls down is if a lot changes between the estimate and the final figure.

For example, let’s say Ted’s SMSF has both a pension and an accumulation balance. Throughout the year, the pension represents roughly 60% of the fund and when we’re asked for our estimate in December, we provide an actuarial percentage of 60%. However, as part of winding up his SMSF, Ted transfers his pension balance to a new fund in December but leaves his accumulation balance in place for much longer – until June. That will profoundly change the percentage at the end of the year (it might be closer to 30%). Unfortunately the final tax return will need to be based on 30%.

It's best to let your actuary know up front if that will be happening so we can allow for it in our calculations.

And you should delay getting the final certificate until the fund really has been wound up and money transferred out of the fund. Otherwise unexpected delays will mean a new certificate is required as it won’t be valid if it’s based on incorrect data.

Do we need to re-calculate rollover amounts once we know the final actuarial percentage?

Legally, the value of a member’s account balance at any time is the amount they’d be entitled to if they left the fund at that time. Believe it or not, that amount doesn’t have to be calculated with perfect hindsight. Think about large public funds. They are paying members out all the time and can’t possibly know the exact tax components of all the income they’ve received or the precise costs of the fund or even investment returns in real time on the payment date. They make approximations – good approximations involving lots of science but approximations nonetheless.

We often don’t do that in SMSFs. When we start pensions on 1 July, for example, we wait until the audited accounts are completely signed off and then use the exact balance amount in our paperwork. Because we’re used to doing it that way, it’s tempting to assume we have to be just as dollar perfect when it comes to winding up and rolling money out of the fund. In fact, we just have to come up with a reasonable and justifiable figure for the amount the member is entitled to on leaving the fund. If – based on the best information available at the time – it was reasonable to assume a member leaving the fund should be entitled to a particular amount, we don’t have to go back and recalculate it once we have more information.

Of course, in an SMSF that’s being wound up, we often end up with a small amount of money left at the end. We need to leave at least some of the member balances in the fund to capture final tax refunds, pay final costs etc. That often means there is a small final payment or rollover – but this can simply be an additional payment at the time, it doesn’t mean the earlier rollover was wrong.

Learn everything you need to know about winding up an SMSF at our upcoming Windups - Tips and Tricks Webinar on 5 June.