FIVE URBAN MYTHS ABOUT SUPER CHANGES:
Much of the conversation about the superannuation reforms relates to reducing pension balances to a person’s transfer balance cap, resetting the CGT cost base for investments and making last minute contributions before the caps drop on 1 July. It is interesting to see that a few urban myths and misunderstandings have developed. In this article I will cover those myths about the transfer of amounts from retirement phase to accumulation phase to ensure the value of the relevant pensions remain within the person’s transfer balance cap.
As a general rule, a person’s transfer balance cap from 1 July 2017 of $1.6 million is the maximum value of pensions that can be transferred to Retirement phase after that time including the value of pensions that were already in place as at 1 July 2017. It is possible for a person to have a higher transfer balance cap if they receive a defined benefit pension because of the restrictions placed on receiving lump sum withdrawals. Defined benefit pensions include many public service pensions, lifetime and life expectancy pensions as well as market linked income streams. Transition to Retirement income streams (TTRS) are excluded from being measured against the $1.6 million transfer balance cap as the income earned by the fund on investments that support a TTRS will be taxed at 15% from 1 July 2017.
Urban myth no. 1:
Amounts transferred from retirement phase to accumulation phase cannot be withdrawn from superannuation.
Incorrect. Any amount used to provide an account-based pension must have met a condition of release of retirement after reaching the person’s preservation age or age 65, whichever is the earlier. Meeting either of these conditions of release means that the benefits are totally non-preserved and can be withdrawn from superannuation at any time.
Urban myth no. 2:
A minimum amount equal to a percentage of a person’s accumulation account is required to be withdrawn from the fund each year.
Incorrect. Only account-based pensions and transition to retirement pensions require a minimum set percentage of the account balance on commencement or as at 1 July each year or to be paid to the pensioner. Where defined benefit pensions are paid from the fund the amount required to be paid annually is determined through an actuarial valuation.
Urban myth no. 3:
Only one pension is able to be paid from retirement phase under the rules that apply from 1 July 2017.
Incorrect. There is no limit to the number of pensions that can be paid from superannuation for an individual. A person may have a number of valid reasons for commencing more than one pension, which may be due to the manner in which contributions were made to the fund, changes in the pension rules or use of pensions to gain the greatest taxation advantage.
Urban myth no. 4:
Any pension balance in retirement phase must be reduced to $1.6 million each year.
Incorrect. The value of the relevant pension measured against a person’s transfer balance cap occurs at the time an account-based pension commences from 1 July 2017 or on the amount supporting account-based pensions on 30 June 2017. The withdrawal of regular pension payments or changes to the pension account balance due to investment gains or losses do not impact on the amount measured against the person’s transfer balance cap.
Different rules apply to the valuation of defined benefit pensions, which are based on the pension payable and a special valuation factor.
Urban myth no. 5:
The amount a person is permitted to have in superannuation is limited to $1.6 million.
Incorrect. There is no limit to the amount a person is permitted to accumulate in superannuation. However, the value of pensions measured against a person’s transfer balance cap for amounts in retirement phase is not permitted to exceed $1.6 million (which is subject to indexation). Also, if a person’s total balance(s) in all superannuation funds exceeds $1.6 million, it is not possible to make non-concessional contributions to superannuation
The new superannuation rules, which commence from 1 July 2017, will impact on the amount of tax paid in the superannuation fund for members with a pension value of more than $1.6 million or receiving a transition to retirement pension (TTRS). Any excess over $1.6 million will be required to be transferred to a taxed environment in accumulation phase or taken from the fund as a lump sum. Investments supporting a TTRS will be transferred from a tax exempt to taxed environment in the fund. While there are a number of decisions to be made, members should understand the facts and ignore the myths that confuse and complicate some relatively straightforward changes.
Source: Super Concepts Blog 28 March 2017