No room for er­ror with your self-man­aged su­per­an­nu­a­tion fund

The Sunday Mail (Queensland) - - NEWS - Noel Whit­taker is the au­thor of Mak­ing Money Made Sim­ple and nu­mer­ous other books on per­sonal fi­nance. noel@noelwhit­taker.com.au NOEL WHIT­TAKER

THE year is rapidly draw­ing to a close, which means it’s highly likely that you will now hold com­pleted fi­nan­cial state­ments for your self-man­aged su­per­an­nu­a­tion fund.

If your bal­ance is over $1.6 mil­lion, the first thing you may no­tice is that your im­pu­ta­tion cred­its re­fund is down from last year.

This is due to the change in rules made by the Turn­bull govern­ment, which re­stricted the amount that could be held in tax-free pen­sion mode to $1.6 mil­lion, leav­ing the rest of the fund’s earn­ings to be taxed at 15 per cent.

Let’s hope it is a warn­ing to the La­bor Party that their pro­posal to abol­ish the re­fund of frank­ing cred­its will not raise as much money as they have claimed.

The next thing you might dis­cover is that the $1.6 mil­lion that was your Trans­fer Bal­ance Cap (TBC) at June 30, 2017, has now grown. It could eas­ily be worth as much as $1.7 mil­lion if your fund earned, say, 7 per cent, while you drew the manda­tory pen­sion of 4 per cent.

This sit­u­a­tion has trig­gered quite a few emails ask­ing what the trustees of the fund should do now. Will the TBC now stay at $1.7 mil­lion – or will it go back to $1.6 mil­lion if the amount in pen­sion mode drops as a re­sult of bad per­for­mance and/or in­creased pen­sion draw­ings in the cur­rent year?

Su­per­an­nu­a­tion guru Mon­ica Rule has good news for you. She tells me that your TBC is no longer rel­e­vant, pro­vided the doc­u­men­ta­tion was done prop­erly as at June 30, 2017.

As long as your fund got it all cor­rect on that date, the fund trustees no longer have to con­cern them­selves with the $1.6 mil­lion TBC. Thus, there is no limit to what your su­per in pen­sion mode could grow to if you had ex­cel­lent re­turns, way in ex­cess of the com­pul­sory draw­downs. And there is no penalty if, for any num­ber of rea­sons, the amount you hold in pen­sion mode drops be­low $1.6 mil­lion.

But there is one fac­tor that is crit­i­cal. If all or part of your fund is in pen­sion mode, you are re­quired to draw a set per­cent­age of the bal­ance of the fund that was in pen­sion mode at June 30. The fac­tor is 4 per cent for any­body un­der 65 and rises pro­gres­sively to 14 per cent at age 95 and above.

For ex­am­ple, if you are aged be­tween 65 and 74 you should be with­draw­ing at least 5 per cent of the pre­vi­ous June bal­ance each year. There­fore, if your bal­ance was $1.6 mil­lion at June 30, 2017, you should have drawn $80,000 in pen­sion for the year ended June 30, 2018. How­ever, if your fi­nan­cial state­ments now show that your TBC has be­come $1.7 mil­lion you will need to in­crease your draw­downs in the present year to $85,000.

This is an­other ex­am­ple of the com­plex­ity of our su­per­an­nu­a­tion sys­tem, and the dan­gers for peo­ple run­ning self­man­aged su­per funds who don’t get it right. De­spite the penal­ties, which can be heavy, I am still amazed by the num­ber of ques­tions I re­ceive from peo­ple who ob­vi­ously don’t know what they’re do­ing. Of­ten, they sim­ply don’t know what they don’t know. Ex­pert ad­vice is crit­i­cal.

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