What can you do if you hold more than $1.6 million in pensions under new super rules?
The introduction of the government’s new super rules is fast approaching. And the challenge facing many retirees is how to manage money that cannot be kept in tax-free pension accounts from 1 July – which is when a $1.6 million limit on tax-free pensions will apply to all retirees, even if your pension was started years ago. And because a special lump sum value will be assigned to defined benefit pensions, some retired public servants may also be impacted by these changes.
If you’re a retiree, you need to decide how to restructure your assets now
If you hold more than $1.6 million in tax-free pensions, you must act before 30 June to comply with the new rules. Considering your eligibility to move money to a spouse’s pension account is a good starting place, but as they must also be eligible to receive new contributions, this option may not be applicable for everyone. Alternatives to consider include moving the excess amount back into the accumulation phase of super or withdrawing it completely. But there are a few things to consider.
Think about the available tax concessions when making your decisions
Moving your money back to an accumulation account from a super pension is considered a rollover or transfer – which means eligibility criteria such as the work test won’t apply. Although accumulation accounts are not tax-free, they’re still very attractive. Income generated inside these accounts (such as dividends and bank interest) are taxed at 15 per cent and capital gains are taxed at 10 per cent (if the investment is held for at least 12 months).
If you’re considering holding money in your own name, your personal marginal tax rates will apply. If you have reached age 65, it is possible to receive income up to $33,000 and not pay tax in your personal name due to the Seniors Australian Tax Pensioners Offset. However, it’s important to consider the long-term – if your income grows, or you receive a capital gain, or if offsets are wound back in the future (something that some policy analysts are lobbying for) you could end up in a different tax bracket.
An accumulation account may create cost and admin efficiencies
In addition to tax benefits, using an accumulation account to hold excess amounts over $1.6 million may create cost and administrative efficiencies. And that’s because your super fund administrator will manage all required tax reporting and financial statements. For self managed super fund (SMSF) members for example, having a separate accumulation account compared to having all your funds in the pension phase generally won’t increase the SMSF administration fees; however, your fund may need to obtain an actuary certificate.
By comparison, if you hold the excess amounts over $1.6 million in your personal name (unless it is a very small excess amount), you may need your accountant to undertake additional reporting in your annual tax return and you may have to establish a separate administration or reporting system to collect the required information – all of which may increase your fees as well as time spent managing your investments.
Most importantly, if you’re considering taking the money out of super, you should be very cautious about the restrictions on contributions applying from 1 July as it may not be possible to return the money to super if your situation changes.
Accumulation accounts can also help preserve your eligibility for other benefits
Balances held in accumulation accounts are not assessed under the Commonwealth Seniors Health Care (CSHC) income test, preserving your eligibility for a CSHC card. But capital held outside super or within pensions established after 1 January 2015 will have a deemed level of income included under this test, so depending how close you are to the threshold, your eligibility could be impacted.
Another benefit of the accumulation account is that money held in these accounts does not need to pay a minimum pension through the year. In fact, the capital can be retained in the account until you need it or your passing, allowing you to preserve funds for future healthcare costs or to provide family support.
There’s a short window left to move excess money into accumulation
If you decide to move any money above the $1.6 million limit into a super accumulation account, you need to provide written instructions to your fund administrator prior to 30 June 2017. Most funds are expected to provide information packs to members sometime in May, but it’s important to be proactive. And if you’re a retiree with multiple pension accounts, don’t forget to consider other factors like estate planning priorities before completing the forms. A financial advisor can assist you with your plans and to meet the 30 June deadline.
This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.
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