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The $1.6million cap on tax free pensions is definitely going to have the biggest impact on self-managed super funds [SMSFs]. To help you understand these new rules and how they will impact you, we have put together a case study of a fund that has built up a large balance over time and that is already drawing a pension from their super fund.
In later case studies, we will look at the Transitional CGT Relief available to those impacted by the changes as well as the Estate planning consequences. Both of these shall be considered before 30 June, but in the interest of keeping it “short and sweet” we have broken it down into sections.
George and Lorraine are both members of the same SMSF. As of 30 June 2016 their fund looked like this:
George and Lorraine know that they are impacted by the $1.6million cap on tax free pensions but are unsure of how it all works, and if they need to do anything before 30 June 2017.
What actions [if any] do George and Lorraine need to take and when?
1. Do not need to take money out of super
This is more of action they don’t need to do. Contrary to some of the messages in the media – George and Lorraine do not need to take any money or assets out of their super fund.
2. Commute pension down to $1.6million
They do however, need to bring their pension accounts back down to $1.6million before 30 June 2017. The best way to do this will depend on the personal advice they receive.
|Before 30 June 2017|
3. Bring their super fund accounts up to date
George and Lorraine need to know what their current super fund balance is so that they can get the right advice, this means they must first bring their super fund up to date.
The change in the super legislation means that SMSFs will be disadvantaged if they don’t move to real-time reporting system for the fund. Many of our clients are using the legislation change as the opportunity to move onto our monthly reporting service.
[ Note – there will be a few limitations in obtaining accurate values before 30 June 2017. To combat this there is a transitional period built into legislation that allows people to exceed the $1.6million by up to $100,000 without penalty, as long as they are back under before 31 December 2017. However, $100,000 is not a big margin for error for most funds, so we need to be as accurate as we can! ]
|As soon as possible and before 30 June 2017|
4. Obtain a valuation of the SMSF’s property
An independent market valuation will be required on all property investments as at 30 June 2017.
We are recommending clients obtain an interim valuation now and a final valuation in June. The interim valuation is needed to give them an accurate idea of their super balance when obtaining advice before 30 June.
5. Update Trust Deed
Many super fund deeds have not been updated since the last major changes to the legislation back in 2007.
This means they may have obsolete rules in the deeds that restrict the decisions made for the fund unnecessarily.
While you could simply have your deed reviewed, we have found the cost of a deed review is more expensive than having your deed updated to the latest superannuation rules.
So it is now early June 2017 and George and Lorraine have brought their SMSF up to date. After taking into account the earnings and valuations of their SMSF asset their situation now looks like this:
So George and Lorraine must each commute $1million [ i.e. $2.6million less $1.6million ] before 30 June 2017.
From 1 July 2017 the fund would now look like this:
From 1 July 2017 the minimum pensions George and Lorraine must take from super drop to $80,000 each. However, they still want to draw $300,000.
While they can still take $300,000 from their pension account, a better strategy could be to draw the further $140,000 from the part of the fund still paying 15% tax. In this way they will preserve the amount in their tax free pension for as long as possible.
For example – If they took $300,000 as a pension, their SMSF would look like this [ignoring earnings etc.]
But, if they took the amount above their minimum pension as a lump sum, their fund would look like this:
These changes to superannuation will impact everyone differently based on their overall personal circumstances. At Superannuation Depot we are there to guide you through these changes to ensure that you maximise your wealth and retirement opportunities. We are licensed Self-managed super fund specialised and are ready to give you personalised advice to deal with the superannuation changes. Call Megan Kelly or Michael Garrone to discuss your personal situations.
General Advice Warning:
Information provided on this website is general in nature and does not constitute financial advice. Every effort has been made to ensure that the information provided is accurate. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult a financial adviser to take into account your particular investment objectives, financial situation and individual needs.
Depot Superannuation Pty Ltd is a corporate authorised representative (No 1240831) of Hunter Green Pty Ltd AFSL 225962.