Super reform myths

There are a lot of urban myths floating around in relation to the super changes, particularly regarding TTR Pensions, the $1.6m transfer balance cap, CGT relief and the ability to make last minute contributions before the caps drop on 1 July.

The following article by Graeme Colley dispels ten of the myths and misunderstandings that have developed among some investors.

Urban myth no. 1

‘The amount a person is permitted to have in superannuation is limited to $1.6 million.’

Incorrect. There is no limit to the amount a person is permitted to accumulate in superannuation. However, there is a limit to the amount that can be held in pension phase, governed by the transfer balance cap which set at $1.6 million on 1 July and subject to indexation.

Also, if a person’s total super holdings exceed $1.6 million, they are not permitted to make non-concessional contributions. The new super rules will impact on the amount of fund tax for members with a pension value of more than $1.6 million. Any excess over $1.6 million will be required to be transferred to a taxed environment in accumulation phase or, if possible, taken from the fund as a lump sum.

Urban myth no. 2

‘Any pension balance in retirement phase must be reduced to $1.6 million each year.’

Incorrect. The value of the relevant pension measured against a person’s transfer balance cap occurs at the time an account-based pension commences from 1 July 2017 or on the amount supporting account-based pensions on 30 June 2017. The withdrawal of regular pension payments or changes to the pension account balance due to investment gains or losses do not impact on the amount measured against the person’s transfer balance cap.

Different rules apply to the valuation of defined benefit pensions, which are based on the pension payable and a special valuation factor.

Urban myth no. 3

‘I can’t make concessional contributions to super once I have more than $1.6 million.’

Incorrect. A person can make concessional contributions to super irrespective of their total super holdings.

However, there is a limit on ‘non-concessional contributions’, which aren’t permitted where a person’s total super holdings as at 30 June prior exceed $1.6 million.

Urban myth no. 4

‘To transfer from retirement to accumulation phase I need to take money out of the fund.’

Incorrect. The transfer of amounts from retirement phase to accumulation phase is really an accounting entry. The member’s pension account balance will be reduced and the accumulation balance will increase by a corresponding amount. This requires the pension to be commuted (converted) in full or in part for the transfer to take place.

Urban myth no. 5

‘I can even out the $1.6 million between me and my spouse without the money leaving the fund.’

Incorrect. In situations where either a fund member or their spouse have more than $1.6 million in super, it is not possible to transfer any excess from their account to their spouse’s account.

It may be possible to help build up the spouse’s account by withdrawing an amount from their account and gifting it to their spouse. The spouse would build up their super balance by making a concessional or non-concessional contribution to the fund, if they meet the rules for making contributions.

Urban myth no. 6

‘Amounts transferred from retirement phase to accumulation phase cannot be withdrawn from superannuation.’

Incorrect. Any amount used to provide an account-based pension must have met a condition of release of retirement after reaching the person’s preservation age or age 65, whichever is the earlier. Meeting either of these conditions of release means that the benefits are totally non-preserved and can be withdrawn from superannuation at any time.

Urban myth no. 7

‘A minimum amount equal to a percentage of a person’s accumulation account is required to be withdrawn from the fund each year.’

Incorrect. Only account-based pensions and transition to retirement pensions require a minimum set percentage of the account balance on commencement or as at 1 July each year or to be paid to the pensioner. Where defined benefit pensions are paid from the fund the amount required to be paid annually is determined through an actuarial valuation.

Urban myth no. 8

‘Only one pension is able to be paid from retirement phase under the rules that apply from 1 July 2017.’

Incorrect. There is no limit to the number of pensions that can be paid from superannuation for an individual. A person may have a number of valid reasons for commencing more than one pension, which may be due to the manner in which contributions were made to the fund, changes in the pension rules or use of pensions to gain the greatest taxation advantage.

Urban myth no. 9

‘On the death of my partner I can transfer their super to my accumulation account.’

Incorrect. From 1 July 2017 it is only possible to have a reversionary pension or death benefit pension maintained in superannuation. The legislation does not allow a beneficiary to credit a death benefit to his or her accumulation account in the fund. Any death benefit pensions that create an excess over and above a member’s transfer balance cap are required to be paid from the fund as lump sums.

Urban myth no. 10

‘Everyone is entitled to the benefit of the indexed transfer balance cap.’

Incorrect. Once a person has used up 100% of their transfer balance cap, which is $1.6 million on 1 July 2017, they are unable to access any increase in the cap due to indexation. The transfer balance cap is indexed to CPI in increments of $100,000.

Source: Graeme Colley, Super Concepts