Slide - We Are Slide - Value Slide - Pride Slide - Focus

Changes to Superannuation - Personal Pension Transfer Cap of $1.6m - Part 2 of 6

This blog article is part 2 of our 6 part series on the superannuation changes. You can access the summary with links to all six parts on our summary blog.

Introduction of a Pension Transfer Cap 

On 1 July 2017 the member balance you can have supporting a pension in superannuation will be limited for the first time in many years.

In the past few years there has been no limit on the amount of money you can have in super, or that you can use to start one or more pensions or income streams. That all changes on 1 July 2017, with a new pension transfer cap introduced of $1.6m. The $1.6m cap does not apply to Transition to Retirement Pensions.

If you have a pension in place on 1 July 2017 the pension will be assessed against your $1.6m cap on that date. For all other pensions (ie those starting after 1 July), the cap will be assessed on the start date of the pension.

 The cap effectively limits the amount that can be transferred to pension phase, and thereby reducing the tax concessions available to a fund with a member balance of more than this amount. A member may still have accumulated superannuation of more than $1.6m, however they will not be able to convert the excess to pension phase.

 For example, lets say John has accumulated superannuation of $2m. He is currently taking an account based pension as he is aged 66. On 1 July 2017 he can only have $1.6m in his superannuation pension account and to achieve this he will need to either partially commute his $2m pension and roll back $400,000 to accumulation phase in the fund OR take the $400,000 out of the fund. Note John does not have to take the money out of the fund – it can be left in the fund, provided it is in accumulation phase.

 The cap is only assessed at the time a member commences a pension. It is not assessed throughout the life of the pension. Therefore, it is possible for a pension to grow above $1.6m if the earnings on the pension assets exceed pension payments taken.

 It is worth noting that the $1.6m pension transfer cap applies to individuals and across all of their superannuation funds, it is not a per fund cap.

 

What happens if you wish to stop a pension after the new cap rules are in place?

Lets say it is now 2018 and John’s pension account balance is now $1.5m. John decides that he would like to cease the pension as he can comfortably live off non superannuation fund investment income. John would write to his superannuation fund and request they commute his account based pension and return his account to accumulation phase. Its commutation balance is $1.5m, and John receives a credit of $1.5m to his pension transfer cap.

This means John can start a pension at a later date with a balance of $1.5m, effectively picking up where he left off.

 Had John’s pension balance increased significantly, to say $1.8m (rather than the $1.5m), John would receive a credit of $1.8m to his pension transfer cap and could start a pension at a later date with $1.8m.

 

What happens on death?

If John’s pension above (lets say it is worth $1.5m) is reversionary to his spouse (Louise) the value of the pension at the date of death will be assessed against his spouses pension transfer cap, 12 months after the date of death.

 If Louise also has a pension in existence, then Louise may not have sufficient room in her cap in which to accommodate this pension.

As John’s pension balance is now regarded as a death benefit under superannuation law, it must come out of the fund as soon as practicable either by continuing the pension or as a lump sum. If Louise wishes to retain the maximum amount in superannuation, it may be possible for her to commute her pension, receive a credit to her pension transfer balance and then continue to receive some or all of David’s member balance as a death benefit pension.

Any amount of David’s pension that cannot be managed under Louise’s pension transfer balance cap will have to be paid as a lump sum out of the fund to an eligible beneficiary.

As Louise is still alive, her pension in place prior to David’s death can be commuted to accumulation phase and retained in superannuation until she needs to draw lump sum(s) from the account or she dies.

For self managed superannuation funds with investments predominantly in property, and significant member balances, these new rules create some planning challenges. We recommend anyone with this profile obtain personalised advice on how the new rules may affect them in the future.

What is the value of the pension?

Most self managed superannuation funds will have account based or allocated pensions. These pensions are valued at the market value of their account balance.

A flexi pension (defined benefit) is valued at its commutation value

Lifetime pensions, life expectancy pensions and market linked pensions are calculated under a new “Special Value” formula.

Anyone who has a defined benefit pension or fixed term pension either inside or outside their self managed superannuation fund should obtain personalised advice as soon as possible, but definitely prior to 30 June 2017 to ensure they understand the operation of the new rules and potential planning opportunities for them.

 

Will the pension transfer cap ever increase?

The pension transfer cap is indexed with inflation, however will only be increased in increments of $100,000.

 

Who gets to use the increase in the pension transfer cap? 

If a member has fully utilised the $1.6m cap, they will not be able to start any further pensions when the transfer cap increases to the next limit of $1.7m.

If a member has utilised 60% of their $1.6m cap, they have 40% cap space left. When the pension transfer cap increases to $1.7m they will be able to start a pension with 40% of $1.7m, being $680,000.

Of course it gets more complicated if you’ve turned off a pension at any point and received a credit to your pension transfer balance cap.

 

What can reverse the use of the cap?

As we have previously discussed, stopping or partially stopping a pension will give a credit to the cap.

Payment splits as a result of a relationship breakdown will also result in a credit to the cap.

Amounts forced back to accumulation phase by the Australian Taxation Office (for members who have not complied with the $1.6m cap rules) will result in a credit to the cap.

Personal injury contributions from structured settlements will also be exempt from the cap.

 

What happens if the cap is exceeded?

Where the pension transfer balance cap is exceeded, the individual will be required to partially commute the excess pension plus an ATO calculated amount of notional earnings within 60 days. This amount can be rolled back to accumulation phase or cashed out as a lump sum. The member will also be liable to pay income tax on the notional earnings. The tax rate is 15% for the first breach, and 30% for subsequent breaches.

 If an individual does not comply with the notice within the 60 day time limit, the entire pension will cease for tax purposes from 1 July in the year the fund failed to comply with the commutation authority – this will result in significant tax which would otherwise not have been payable. The individual will still be personally liable for the tax on notional earnings discussed in the preceding paragraph.

There will be a six-month grace period for the six months between July 2017 to December 2017 where the transfer balance is less than or equal to $1.7m and all the pension balances relate to pre-1 July 2017 pensions. Provided the excess is rectified by 31 December 2017 no notional earnings will be calculated.

  

Disclaimers

This information is provided by A Squared Advisers Pty Ltd.

The information provided to you above is purely factual in nature and does not take account of your personal objectives, situation or needs. The information is objectively ascertainable and, therefore, does not constitute financial product advice. If you require personal advice you should consult an appropriately licenced or authorised financial adviser.