Super Reforms – Pension Changes
From 1 July 2017, there will be a $1.6 million transfer balance cap on the total amount of accumulated superannuation an individual can transfer into the tax–free retirement phase. Subsequent earnings on balances in the retirement phase will not be capped or restricted. This means that a member may have a transfer balance cap of $1.6m but hold an account with greater than this amount due to favourable investment returns. Conversely, poor returns could see an actual balance less than the transfer balance cap. Such a deficiency cannot be rectified by further contributions unless it was caused by divorce or investment fraud.
Savings beyond this may remain in an accumulation account (where earnings are taxed at 15 per cent) or taken from the superannuation system.
Any members with more than $1.6m in retirement phase on 1 July 2017 will be penalised. The exception will be members who are over by no more than $100k. Such members will have 6 months to rectify the situation. With this exception, any amount in breach will be deemed to earn a little under 9% and taxed at 15%. A second offence can see that tax rise to 30%. A third and it is likely that the whole pension will lose its tax-exempt status. Where a member, with a need to commute, has multiple pensions they may choose which to commute. This decision will be influenced by such considerations as estate planning, deeming and tax components.
The valuation of existing complying pensions will depend on the type but an existing lifetime complying pension will be valued at 16 times the pension amount at the end of this year. If the value, including the value of any account based pensions, is in excess of $1.6m the account based pensions will need to be commuted to achieve rectification. Where the complying pension alone is in breach of the $1.6m transfer balance cap no account based pensions will be allowable. The complying pension cannot be commuted so the pension will be taxed at a higher rate.
The transfer balance cap will be indexed and will grow in line with CPI in $100,000 increments however any such indexation will be prorated to existing pensioners such that a member who has used 50% of the $1.6m transfer balance cap will only receive 50% of the increase. That member will have a personal transfer balance cap of $1.65m rather than the $1.7m general transfer balance cap that would be applicable to a member that has not yet commenced a retirement phase pension. As at 1 July 2017 everyone will have a $1.6m transfer balance cap but individual differences will arise over time.
Where existing pensions must be commuted to the $1.6m level any grandfathering on deeming for the purposes of the Seniors Health Card will be lost. One of the advantages of a pension was the continuation of its exempt current income status after death even if the assets had to be disposed of to pay out of the fund. This advantage will be reduced to the extent that a member’s pension entitlement will be restricted. This makes both existing estate planning arrangements and the application of capital gains tax of significant importance.
Many of the items covered here require further explanation so they will be explored further in future articles.