The maximum amount of superannuation that can be used to fund a tax-free pension in retirement is now restricted to a cap of $1.6 million per member.

For example, say you are over age 60 and have met a condition of release (such as retiring from the workforce), or are over 65, and wish to start a pension. Prior to 1 July 2017, there was no limit on how much with which you could start a pension.

This had two positive effects. Firstly, all of the pension income was tax-free to you as a member, and secondly, all earnings on the assets used to fund your pension were also tax-free.

The Transfer Balance Cap rules came into effect from 1 July 2017, meaning that when transferring a member’s superannuation accumulation balance to pension phase to start what is now called a ‘retirement phase pension’, you are restricted to a maximum of $1.6 million per member and any balance above that will need to remain in accumulation phase.

If you are above age 60 and have met a condition of release, you can still cash out lump sums from your accumulation balance tax-free, but the earnings on those assets within the fund will be taxable at the (albeit concessional) rates applicable to superannuation, rather than being tax free.

Some common question that accountants and financial planners now receive from their SMSF trustee clients are:

• Can I have a pension in my SMSF and another one through a retail or industry superfund to give me greater than the $1.6m cap?
• If pension payments reduce my balance significantly, can I transfer more of my accumulation account to pension phase to ‘top it up again’?
• What if the value of the assets within the fund supporting the pension goes up? Do I need to withdraw more from my pension to get it back below the cap, or conversely, if the investments in the fund perform poorly, can I top up the pension balance from my accumulation account?

Here are simplified answers:

Everyone has their own transfer balance account. Your personal cap is determined based on a number of things, including the general transfer balance cap of $1.6m at the time you first commence a retirement phase pension, any indexation that may be applied to the general transfer balance cap, and the total amounts you have used to commence retirement phase pensions.

If you do have more than one retirement phase pension prior to 1 July 2017, you must ensure their sum, in aggregate, did not exceed the cap on 1 July 2017, and since, if starting any new pensions.

Some people have certain defined benefit and market-linked pensions that were in place prior to 1 July 2017 that are valued differently. If you do have one of these pensions and also a pension via your SMSF or another retail or industry fund, you do need to seek professional advice as depending on the style of defined benefit or market-linked pension, you may have a reduced personal cap, or no cap remaining at all, and may possibly be in excess.

If your transfer balance account exceeds the cap at any time, penalties may apply. The transfer balance cap applies to all retirement income streams, including those that were in place prior to 1 July 2017, and any commenced after 1 July 2017.

To answer the second and third questions above, pension payments don’t give you back more cap to work with and likewise market movements, both positive and negative are ignored, meaning positive market movements that put your pension balance above the cap are not seen as being in excess and negative market movements don’t give you the opportunity to top up your cap.

Penalties apply for exceeding the cap

It’s important if you are in pension phase and either had an existing pension as at 1 July 2017 or have started a pension since and you are above your cap, that you seek advice from your accountant or financial adviser. There are penalties that apply where your transfer balance account exceeds your transfer balance cap.

For example, say that as at 30 June 2017 you had an account based pension in place worth $2 million. You would have an excess transfer balance amount of $400,000.

In the case of an excess, you need to reduce the amount held in your retirement phase pension by way of a partial commutation of the excess amount back to accumulation phase and pay excess transfer balance tax.

Excess transfer balance tax is based on notional earnings determined by a legislative formula. Excess transfer balance tax is payable for the total days where the amount held in pension phase of superannuation is in excess of the cap. Therefore, the sooner the excess amount is rectified, the less transfer balance tax is payable. Notional earnings are subject to tax at 15% for the first breach or any breaches that occur in 2017/18, and 30% for subsequent breaches.

If you are not sure of your $1.6 million cap position, it is important you seek professional advice. If you are unaware of the breach or simply allow the fund to remain in excess, the Commissioner will make a determination once the information from superannuation funds is received, and will issue an assessment for excess transfer balance tax which can include other penalties.

Disclaimer:
This article is not legal or personal financial advice and should not be relied on as such. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial advice relevant to your circumstances before making investment decisions. Where a particular financial product is mentioned you should consider the Product Disclosure Statement before making any decisions in relation to the product. Whilst every reasonable care has been taken in distributing this article, Australian Unity Personal Financial Services Ltd does not guarantee the accuracy or completeness of the information contained within it. Any views expressed are those of the author(s) and do not represent the views of Australian Unity Personal Financial Services Ltd. Australian Unity Personal Financial Services Ltd does not guarantee any particular outcome or future performance. Taxation Information in this document should not be relied upon without seeking specialist advice from a tax professional. Australian Unity Personal Financial Services Ltd ABN 26 098 725 145, AFSL & Australian Credit Licence No. 234459, 114 Albert Road, South Melbourne, VIC 3205. This document produced in June 2018. © Copyright 2018