It's time to get on top of the super changes
Given the magnitude of the superannuation changes applying from July 1, this year's budget is most unlikely to include further changes. All will be revealed next Tuesday, allowing at least six weeks to implement any required action before the new rules apply.
The complexity and extent of the changes has led to confusion and uncertainty about their implications, especially for the many people with both employer-provided defined benefit pensions and private super or pension accounts. The new $1.6 million cap on pension accounts will encompass both types of retirement pensions.
For recipients of defined benefit pensions, the changes don't limit the size of the annual defined benefit pension that can be received in retirement. Instead, higher income tax rates will apply to defined benefit pensions above $100,000 a year. The dramatic change for recipients of private super pensions after July 1 will be if the combined value of any defined benefit pension and their private pension account exceeds $1.6 million.
Because they will be required to shift any private pension account above the combined $1.6 million cap into an accumulation account, holders of large private pension accounts and larger defined benefit pension recipients will need to commute part of their private pension account into an accumulation account.
There are absolutely no restrictions on how much a retiree can have in an accumulation account provided that the money is already in a super or pension account on June 30, 2017. There's no need for anyone to cash out any of the existing money in super unless they want to.
The essential action required is to ensure that the amount in a private pension account falls within the $1.6 million cap less the accrued value of any existing defined benefit pension. That assessed value is calculated as 16 times all the annual defined benefit pension at July 1, 2017.
Retirees who don't have any private pension accounts won't be affected by the changes. However, those starting a defined benefit pension after July 1 will need to limit the size of any private pension they begin or already receive to stay within the $1.6 million cap.
While the changes limit the annual amount of future employer contributions to accumulation accounts, there are no restrictions on the notional or actual employer contributions to defined benefit accounts. This avoids the need for any actions (such as retiring before June 30, 2017) to mitigate the impact of the changes.
It's also worth noting that there have been no changes to the taxation treatment of superannuation benefits taken as a lump sum. Drawn after age 60, funded super benefits will remain tax-free, protecting the incentive to continue to retain money in super for as long as desired.