Pension funds and asset valuations

My client is planning to start drawing a pension from her fund with her entire member balance on 1 January 2023. Will the fund’s assets need to be revalued before the pension starts?

Potentially, yes.

To ensure the correct starting value is reported for the purposes of the transfer balance cap (ie the cap which limits the amounts transferred into pension phase – currently $1.7m), the SMSF trustee will need to calculate your client’s member balance in the fund as at the pension’s start date. This will usually involve:

• processing the fund’s transactions up to that date,
• revaluing to market any assets for which market values are easy to obtain (eg listed shares, widely held managed funds), and
• considering if an updated valuation is required for other assets such as real property, private company shares, units in private unit trusts etc. An updated valuation would generally be appropriate if the asset hasn’t been revalued recently (in say the last 6 months) and the last valuation is now materially inaccurate or a significant event has occurred that may have affected the value of the asset since it was last valued.

For example, if the fund owned property and a market opinion was obtained as at 30 June 2022 and included in the fund’s 2021/22 financial statements, it usually wouldn’t be necessary to get another market opinion as at 1 January 2023 unless there was a material change in value. But any listed shares or managed funds should be revalued as at 1 January 2023.

What’s the risk if the starting value of the pension isn’t correct?

If the fund’s asset values are understated, your client may have more money generating tax exempt investment income than the transfer balance cap would normally allow. Their minimum pension amount may also be understated. If the ATO thinks your client hasn’t drawn enough pension to meet the (correct) minimum amount, the tax exemption on the fund’s investment income could be denied.

Conversely, if the fund’s asset values are overstated, your client may use up more than needed of their transfer balance cap and may be drawing more pension out of the fund than necessary.

Are the rules any different for transition to retirement income streams (TRIS)?

Yes and no. Certainly, the issues regarding the calculation of the minimum pension amount are still relevant for a TRIS but the trustee also needs to be careful that the maximum pension amount isn’t overstated. The issues relating to the transfer balance cap and the tax exemption on the fund’s investment income won’t be relevant until the TRIS becomes a retirement phase pension (eg on the member’s 65^th birthday, when they notify the trustee of their retirement). Where accountants/advisers have SMSF clients drawing TRISs, looking ahead to when the pension might become a retirement phase pension (ie when there is likely to be a trigger event), will help alert clients to when updated asset valuations may be needed.

Starting pensions and want to learn more about the issues to consider? Check out our Bite – Practical tips and traps when starting pensions. Available with a subscription to Education Bites. More info is available here.