What you need to know about rolling back excess super to manage the new $1.6 million cap

If you hold more than $1.6 million in super, time is almost up to make your final decision about how to restructure your accounts to comply with the pension balance transfer cap coming into effect from 1 July 2017. There are several strategies that can help you manage excess amounts, but keeping as much as possible within the super environment is expected to be a popular response.

Using your accumulation account to hold these excess amounts can be very beneficial for several reasons including tax, ease of administration and investment management, but how do you do it and what are the considerations for choosing which accounts to stop and which to keep?

The first step is to assess your eligibility for the Commonwealth Seniors Health Card

It’s not uncommon for members of self managed super funds (SMSFs) to have multiple pension accounts. If you’re in that situation, then you may be wondering which accounts to retain in pension phase and which of those to cease and roll back to accumulation phase. If you hold a Commonwealth Seniors Health Card (CSHC), then firstly check if any of your pension accounts receive concessional treatment under the CSHC income test – generally accounts started before 1 January 2015 – as protecting these accounts may help you retain your CSHC.

Pensions started after 1 January 2015 will have a deemed level of income included under the CSHC income test. This also applies to capital held outside super. Although balances held in accumulation accounts are not assessed under the test, protecting the grandfathered concessions on older pension accounts could be valuable in the future if your personal circumstances change (for instance, if your spouse passes away) or if there are legislative changes.

If maximising estate planning is your goal, there are extra considerations to review

Many SMSF members want to consider how their benefits can be passed on to their next generation in a tax-effective way. If this is important to you, then you may also wish to consider the underlying tax components within each of your pension accounts when reviewing which pension accounts to keep as part of the $1.6 million pension cap.

If you’re aged 60 years or older, all pension payments you receive are tax free and therefore the tax components make no difference to you. But, it’s important to note that these components must still be recorded within your SMSF accounts as they are assessed by the ATO upon your passing. The differences between taxable and tax-free components are as follows:

  • Taxable components

    These are generally built up from the super guarantee, salary sacrificing and earnings, and are often the predominant component in established funds. Upon your passing, they can be paid to your spouse tax free, but your adult children beneficiaries will bear a 17 per cent tax if they receive the components as part of a death benefit payout.
  • Tax-free component

    These are generally built up from non-concessional contributions. Upon your passing, they can be paid tax free to spouses, adult children and any other beneficiaries.

Because pension accounts lock in the proportions of tax-free versus taxable amounts at the date the account is started, it is desirable to try and retain your pension accounts with the highest tax-free proportion within the $1.6 million pension balance cap. Whereas selecting to close or reduce the pension accounts that have higher taxable proportions may help protect the valuable tax-free components for as long as possible.

The efficacy of your plan depends on the integration of several factors

The investment performance of your fund, the amounts withdrawn from it over time and the life expectancy of you and your spouse can all impact on how effective this plan is. To elect which accounts that you want to retain within the $1.6 million pension balance transfer cap, you’ll need to provide instructions and a trustee resolution to your fund administrator. These important documents need to be completed before the end of the financial year or you may incur serious tax penalties. These are complex decisions, so if you need assistance, it’s important to get professional advice now.

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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Nerida Cole

Managing Director, Head of Advice

Nerida is a highly experienced financial adviser with a specialisation in all aspects of superannuation including self managed super funds (SMSF), retirement planning and wealth-building strategies. Nerida is responsible for the training, development and mentoring of all of Dixon Advisory’s team of Financial Advisers Australia wide.

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