Superannuation: Susan Hely Make sure the cap fits

Super members with a pension income stream would be wise to check the numbers

Just how many retirees have more than $1.6m is unknown because they often have multiple accounts

Retirees need to keep an eye on their superannuation balance before the government’s new limits come into effect on July 1 this year. If a retiree’s pension exceeds $1.6 million, they must either sweep the excess into an accumulation account or even take it out of the super system. If they don’t they could be hit with higher taxes.

The excess can remain in the accumulation fund but earnings will be taxed at 15%, whereas money in the pension phase is tax free.

The problem for retirees, however, is that in certain circumstances there can be some complications around the balance transfer cap. So much so that some experts are describing the new rules as worse than the hated reasonable benefit limits (RBLs) that were dropped in 2007.

RBLs were complicated and an administrative pain for funds and members. They were costly for both funds and members, who needed advice to work out the limits. There was a celebration when RBLs were dropped.

Peter Hogan, head of technical at the SMSF Association, believes that the $1.6 million balance transfer arrangements are worse than RBLs. There are plenty of rules from the tax office covering all sorts of tricky circumstances, such as what happens if a spouse dies and the retiree inherits their superannuation.

And what happens in the case of pensions paid from a defined benefit fund? You only have to look at the guidelines from the tax office. In its recent 100-page law companion guidelines on the changes, some 65 pages are devoted to the transfer cap.

The changes are keeping technical experts such as Hogan busy. He is presenting three-hour seminars to financial planners around Australia outlining what they mean.

Certainly the new balance transfer rules are an extra burden for retirees. But most retirees don’t need to worry about their pension being taxed in retirement. According to the Australian Bureau of Statistics, the average super balance for men aged 65-69 is $354,564 and for women in the same age group it is $249,183.

But retirees who are lucky enough to have more than $1.6 million may need to act before July 1. Just how many retirees have more than $1.6 million is unknown because they often have multiple accounts.

Hogan says there has been some confusion over selling investments but recent clarification from the tax office explains that retirees don’t have to dispose of anything between now and June 30. But they may have to move assets back into an accumulation account.

If you have your pension with an industry fund, it can’t do anything without your consent. “The rules say we must get instruction from the member,” says Shane Mather, head of product and actuarial at Sunsuper. But rather than wait for members to contact them, industry funds such as Sunsuper, REST and AustralianSuper are proactively contacting members.

Sunsuper, for example, is taking a three-pronged approach. Its financial planners are phoning all members

who have more than $1.4 million in the pension phase. The $37 billion fund is also writing to all these members as well as sending them a “significant event notice”.

Why $1.4 million when the limit is $1.6 million? Mather says the fund doesn’t know how much other super the member might have.

If a retiree has a mix of pension types – for example, an account-based pension and an annuity – they have to add up the amounts and make sure that the total doesn’t exceed $1.6 million.

Mather says pensioners with more than $1.6 million in their account are usually aware of any changes.

Sam Prenesti, manager of external relations at Australian-Super, says Australia’s biggest super fund will be revising the content on several pages of its website, calling members, updating forms, posting editorial in the blog and putting a Facebook post to link to the fund blog.

Penalty for breaches

If fund members don’t switch the excess across to an accumulation fund, all super funds have to disclose pension balances over $1.6 million to the tax office. It will impose a 15% tax for any excess periods that start in the 2017-18 financial year. From July 1, 2018, the rate is 15% for the first-year breach and then 30% for subsequent breaches.

There is a grace period for excesses below $100,000. The tax office says that if at July 1 the total value of your retirement phase income streams is between $1.6 million and $1.7 million and the excess comes from account-based income streams, then you have six months to remove the excess capital without penalty.

A 15% tax sounds like the same rate paid on investment earnings but Hogan points out that it can be higher than if a member moved to an accumulation fund. Depending on the investments, tax can be substantially lower than 15% if the investments include Australian shares that receive franking credits.

The transfer balance cap is initially $1.6 million for the 2017-18 financial year but will be indexed in $100,000 increments each year in line with CPI.

The transfer cap excludes subsequent investment growth or losses. For example, if you start a pension with $1.6 million and its value grows to $1.7 million, this is not regarded as exceeding your cap. However, if the value goes down over time as you use the funds to live on or you suffer losses, you can’t top it up.

There has been some concern over what happens if a retiree’s spouse dies and they receive a pension from their super, or if a former spouse has been ordered to pay a portion of their pension income stream as part of a Family Court settlement. Both are counted towards the $1.6 million cap.

Transition to retirement (TTR) income streams will not count towards your cap from July 1.