Q: I’m age 63 and I retired during 2015. I know we have a limited window of opportunity given the changes which take effect from 1 July 2017. However, what happens if I have more than $1.6 million in pensions? I have about $1.85 million in super…Should I not bother to do anything about it or should I look for other alternatives? Do I need to do something?

A:  With the introduction of the $1.6 million transfer balance pension cap (TBP cap) from 1 July 2017, you have a few different options to consider. Contribute further funds (refer to a recent Blog – click here), withdraw excess funds or restructure your pensions to comply with the $1.6 million TBP Cap.

Broadly, the $1.6 million TBP cap is a limit imposed on the total amount that a member can have in the tax-free pension phase account from 1 July 2017. Any excess funds contained in a pension phase account (above the $1.6 million cap) will need to be returned to the accumulation phase or withdrawn from superannuation.  The Australian Tax Office (ATO) will advise members in writing as to the excess amount.

Should you fail to complete a restructure prior to 1 July 2017, notional earnings will be calculated by the Australian ATO on the excess above the TBP cap will be subject to an excess transfer balance tax.

Once the excess funds above the $1.6 million TBP cap are returned to the accumulation phase, the investment earnings will be subject to a maximum tax of 15%. This is a significant change from the nil tax on earnings at present for all pensions.

For couples, superannuation has been viewed as a pool of retirement savings due to the tax-free treatment of investment earnings within pension accounts and pension payments for retirees over age 60. To manage your super balance being tested against the $1.6 million TBP cap as of 1 July 2017, you could consider undertaking a withdrawal and re-contribution strategy.  A withdrawal of the excess amount above the $1.6 million TBP cap, and a non-concessional contribution into your spouse’s account[1].

An ongoing concern of many Australians is the continual legislative changes and future changes that might impact their retirement planning and savings. Having a mix between superannuation and non-superannuation assets is another diversification strategy which should be considered. Considering diversification in your investment is important, as the old saying goes do not put all your eggs in one basket.

With the opportunity to remove funds from super, if you are paying tax on your investment income you may not benefit. The excess funds above the TBP cap can be retained in superannuation phase. For example, if you are subject to the marginal tax rate of 19% or above (plus the Medicare Levy), this exceeds the maximum tax rate of 15% within super.

On the other hand, if you’re not paying any personal income tax, then it could be worthwhile. For example, if your taxable income is $4,000 per annum, you will have $14,200 (ie $18,200 – $4,000) of the Tax-Free Threshold remaining (excluding tax offsets and rebates). This means you could receive up to $14,200 of tax-free income and capital gains each financial year.  This could equate to an amount of $473,333 in additional investment held in your personal name (ie $14,200 / assuming a gross rate of return of 3% per annum).

The decision to remove funds from superannuation will be dependent upon your circumstances, but once you complete the withdrawal you will be ineligible to contribute further non-concessional contributions due to the $1.6 million total superannuation balance limit.

Undertaking a restructure of your superannuation prior to 1 July 2017 needs to take into consideration the capital gains tax implications. Should the fund have a portion within the accumulation phase for the 2016/17 financial year, that portion of the capital gain generated when disposing of assets could be subject to tax at 10%. Before undertaking the restructure it is important to seek advice about the taxation implications and whether the transitional capital gains tax relief can be applied.

So what is next?

The changes from 1 July 2017 can be confusing especially when it comes to how much you can contribute and the introduction of the lifetime caps on both contributions and pensions. To ensure you can determine the impact on your retirement planning and make an informed decision, seek advice from a qualified financial adviser as soon as possible. Given these changes, as an industry, we expect to be quite busy for 2017 and so don’t leave your planning to the last minute.

Article written by Damian Hearn, WealthPartners Specialist Adviser


[1] Assumes eligibility to access tax-free lump sum from superannuation over age 60 and meeting a condition of release such as retirement. Also assumes an eligibility to contribute into superannuation based on satisfying the contribution rules, work test and contribution limits.