Hold $3.2m tax free in super

The rules are changing but there are strategies for maximising the tax advantages

It’s time to tackle the $1.6 million pension balance transfer cap. First, this is not a limit on what you can hold in your total super, just what you can hold in the tax-free retirement phase. If you have more than $1.6 million in retirement accounts, or expect to get to this level, don’t be deterred – super is still expected to be an attractive option. With three months to go in our super rules countdown, here’s what you can do to help keep your retirement plans as tax effective as possible.

Working couples should look into the littleknown but very valuable strategy of annual spouse splitting. This rule allows the employer’s super guarantee, as well as concessional salary sacrifice contributions, to be transferred to your spouse’s super account at the end of each financial year. When fully maximised this could allow a couple to hold $3.2 million in tax-free accounts at retirement. Retirees have another option up their sleeve – they could take money out of super and re-contribute it to their spouse as a non-concessional contribution. Age and work test requirements apply and it will pay to check lump sum tax and contribution limits too.

Excess amounts can be left in super. If re-distributing to a spouse isn’t an option, alternatives include taking the excess out of super and holding it in your own name or rolling it back to the accumulation phase of super. The second option is expected to be more tax effective and more administratively efficient. Money held in accumulation accounts receives very favourable tax concessions, including a maximum of 15% payable on earnings (dividends, interest) and 10% on capital gains for investments held for at least 12 months. This compares with personal marginal tax rates, which can be as high as 49%. Although seniors currently have access to a generous tax offset that can help bring down personal tax, there have been calls for this to be wound back. Further, earnings in accumulation accounts are not assessed for Commonwealth seniors health care card purposes. From an administrative point of view, having a portion of money in the accumulation phase usually won’t result in extra fees and charges (compared with holding it all in a pension account), yet the tax reporting and financial statements would be taken care of by your fund. This saves valuable time and cost compared with managing these requirements yourself if investments are held in your personal name.

CGT relief and estate planning. If rolling back a portion of your money to the accumulation account, fund members have the option of claiming CGT relief. Because different calculations apply depending on how the fund is structured, it will be important to get advice to work through the strict eligibility criteria, particularly if you have an SMSF with sizeable unrealised profits.

Retirees with multiple pension accounts also need to consider which accounts should move back to accumulation phase and which should stay in the pension phase. Where accounts have different estate planning tax components, keeping the accounts with the highest tax-free percentages in pension phase is expected to help if funds are not spent during retirement and upon death pass to adult children.

If you have a transition to retirement income stream, it is not limited by this $1.6 million pension transfer cap but faces separate changes from July 1. So if you have one, should you keep it going? Next month I’ll talk you through this and how the new rules impact these accounts.

Spouse splitting could allow a couple to hold $3.2m in tax-free accounts