Post Retirement Accumulation Accounts – the New Entry for SMSFs

In “The Guru’s Guide to SMSFs” I look at the case of what to do with pension accounts above $1.6M. Most of us are aware that the laws suggest to clients to retain the excess within the concessional superannuation system in a post-retirement accumulation account (“PRAA”). This is a new deal for SMSFs and one that advisers have to get on top of quickly. Good advisers will help manage and build a strong purpose for the PRAA while non-advisers or those who do not have SMSFs as a strategic focus will leave clients floundering. Blogs like these, face-book posts around PRAA and word of mouth will see wealth SMSF clients wanting more or choosing better.

So what can we do with PRAA?

Let’s look at Gary Smith, aged 64 who has $2M in his account based pension on 1 July 2017. This means he has an excess of $400,000 – so far so good. Gary decides to commute the $400K and transfer to the accumulation side of his Fund.

Now the $1.6M Gary has in his pension account, at age 64 will provide a minimum tax-free retirement income of $64,000. If that is enough for Gary to live on, then what is the purpose of the PRAA?

A good SMSF adviser can come up with a number of ideas and strategies including:

  1. Multi-generational Family holidays: These seem to be very in-vogue at the moment. And why wouldn’t it be with rich grandpa and grandma picking up the tab. Here is a great article on this new trend: https://www.internationaltraveller.com/multi-gen-travel-holiday-kids-parents-grandparents/
  2. Discretionary non-budgeted expenses: There are a range of these including updates to the home (particularly for elderly home-owners), new cars, a recreational vehicle, overseas holiday and the list goes on.
  3. Gifts: Charitable gifts and helping out the family when needed.
  4. School Fees: Pay for grandchildren’s school fees directly from the post-retirement account.
  5. Refundable Accommodation Deposits: Unless you pay a daily fee to a nursing home you will need at least $500k for a RAD, a deposit that is used to secure a place at a nursing home. This deposit is non-interest bearing and is returned when the care recipient leaves the home or dies. To take this out of the pension account will severely deplete the capital. Quite apart from the RAD, nursing homes are an expensive daily proposition if the SMSF member does not qualify for the aged pension.

Plus I am sure that your clients can think of 101 more things to use the surplus for. However if your clients wind down their balance in their pension accounts for day to day expenses, health care and travel plans, then apart from the RAD above, the PRAA will grow and accumulate. This account must be considered a SMSF estate planning account and to:

  1. Pass on wealth to the next or succeeding generations
  2. Maximise returns to ensure future generations are better off.

I could spend a whole day on SMSF estate planning and there is a great chapter in the Guru’s Guide on it. But, at this time, let’s get our strategic thinking hats on and start telling it like it is to clients. If you have a PRAA you must do a SMSF estate plan – now.

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