In the lead up to 30 June 2017, much was written about the new “$1.6 million transfer balance cap” for superannuation pensions. A great majority of that material was technical and difficult to understand. We thought a simple explanation would help. To make reading easier we refer to the $1.6 million transfer balance cap as “the cap”.
The article is brief and simplistic as we try to avoid jargon and too many details. To understand what the cap is trying to achieve, it’s helpful to outline the federal government’s motivation behind the change. In short, it’s a measure that will raise more revenue… and no doubt, they would argue it was done under the auspices of fairness by taxing “the rich”. There other factor about the cap that will provide you with some context is, that it financially impacts individuals at their retirement, although it could be said the cap might change the savings behaviour of some individuals in the lead up to their retirement.
Unless you have a defined benefit retirement arrangement (and few do these days), prior to retirement, your account will be in “accumulation” mode. During this phase, your concessional contributions and fund earnings are taxed at 15%. There has been no change to how that works.
What has changed is what happens when you retire. At this point, your “accumulation” balance changes into “pension” mode and all income from the underlying investments become tax-free in the super fund. This, in turn, allows a higher pension for the individual during their retirement.
From 1 July 2017, the new cap limits the amount of accumulated funds that can be switched into a pension at $1.6 million per person. If your accumulation account balance has more than $1.6 million, the excess remains in accumulation phase with earnings taxed in the fund at 15%. For example, if your accumulation account balance was $2.0 million at the time of your retirement, then your pension account balance is limited $1.6 million and the $400,000 excess amount remains in accumulation mode and taxed at 15%. At retirement, in addition to limiting a pension account balance to $1.6 million, a special and “notional” record is created, and maintained over time, so the member knows the amount of their notional account.
The funds transferred from accumulation to the pension account (no more than $1.6 million) will be an increase in this notional account. Pension payments won’t reduce the notional account balance but some other payments do, such as converting (commuting) part or all of your future pension income into a lump sum payment will reduce your notional cap balance. If your notional cap balance falls below $1.6 million, you can top it up with monies from your accumulation account (if any). In future, the $1.6 million maximum cap balance will be adjusted upwards with inflation.
The rules governing SMSFs, just like tax rules, are complex so you should get professional advice before doing anything at the time of retirement.
Written by Chieftains an accounting firm that exists to help business owners increase profits and reduce risks allowing them to astutely provide for their retirement.