New super regime is finally here
The parliamentary approval of the new super arrangements allows all affected super fund members to review and, if necessary, change existing strategies to comply with the new rules.
Those already retired, or about to retire, will be required to ensure that their tax-free pension accounts don't exceed the $1.6 million limit on these accounts applying from July 1, 2017. Not surprisingly, there is some confusion about how this limit will operate.
First, it doesn't include any money owned by a spouse or partner. Every individual is entitled to have up to $1.6 million in a tax-free retirement pension account.
Second, it doesn't include any money in a transition-to-retirement pension account because after July1, 2017 the income received in these accounts will no longer be tax-free.
Third, and most importantly, the $1.6 million cap doesn't limit the annual pension that can be drawn from a defined benefit pension account.
New rules will apply to the taxation of all defined benefit pensions in excess of $100,000 a year but retirees will be allowed to continue defined benefit pensions in excess of these amounts. However, this doesn't mean that the $1.6 million cap isn't relevant for defined benefit pensioners.
Many defined benefit pension recipients, even those with relatively small pensions, will be restricted from also receiving private tax-free pension payments.
From July 1, 2017, the private pensions cap of $1.6 million will be reduced by the assessed lump sum value of defined pension benefits received, calculated by using a multiple of 16 times the annual pension.
In practical terms, this means that many defined benefit pension recipients will be forced to reduce their investments in private tax-free pension accounts.
Those receiving defined benefit pensions of $100,000 or more will no longer be able to hold or open tax-free private pension accounts.
The important thing for those affected by the changes to remember is that they will still be able, if they wish, to retain all money in excess of the $1.6 million cap in tax advantaged superannuation accumulation accounts. No one will be forced to remove any money from their existing super accounts.
Apart from the costs of moving money from a tax-free pension account to an accumulation account, the tax will be payable on investments in accumulation accounts on annual income received at a maximum rate of 15 per cent. In many cases, this liability will be less than that payable in personal names.
In summary, now is the time to review the impact of the changes before taking any action. There is certainly no need to panic and, for example, withdraw money from superannuation accounts before evaluating whether this is the appropriate response to the new regime.