skip to content
RaboDirect
 
Share

Tips and traps for super in the Pension phase

Tags Retirement Planning tax-news tax-tips
Category SMSF

changes-to-super-pension-phase

Legislative changes to implement the Government's superannuation reforms passed the Parliament on 23 November 2016 and the new super rules from the 1 July 2017 will affect those with super in the Pension phase.

With the changes impacting the maximum balance of tax-free pension funds and Capital Gains Tax relief, we have compiled a list of tips and traps to help you navigate the new rules and make the most of your super.

Super balance over $1.6M?

If you have a superannuation balance above $1.6M then you are looking at the decisions outlined in our article Changes to super rules – what this means for your SMSF’s cash. The decision will involve an assessment of the options for your personal situation. Here are some tips and traps to consider:

Tips:

  • If you keep the excess funds in accumulation phase, then your annual minimum pension will reduce on your pension account. If you still require more than the minimum pension for your living expenses, or require one-off lump sums for whitegoods or a car, then consider taking these as a lump sum from your accumulation balance. Still a tax free payment to you, but helps preserve the balance in your tax exempt pension account.
  • If you have to move funds out of super then remember a couple over 65 can earn $28,974 each without paying tax or $57,948 combined in 2016/17. That threshold is made up of Individual Tax-free Threshold, Low Income Tax-free Threshold (LITO) and Seniors & Pensioners Tax Offset (SAPTO).
  • If for any reason you go back to work, you can still make concessional contributions to your accumulation account up to $25,000 per year. As mentioned above it may be better to use an alternative fund to the one that holds your pension for new contributions.
  • Don’t just consider your current assets inside and outside super. Are you likely to receive an inheritance? Do you have an appreciating asset outside super? Will you sell a holiday home in the future? All of these scenarios will have an effect on the amount of tax that you’ll pay in the future. 

Traps:

  • Be careful about electing to take the amount above $1.6M out of the superannuation system as you will not be able to reverse that decision later.
  • Defined Benefit Pensions are caught under the $1.6 million limit too.  For those with Defined Benefit Pensions the amount considered as part of your $1.6M Pension Transfer Balance is 16 times your annual pension payment. This works out as a very generous calculation.

To reset or not? Capital Gains Tax (CGT) relief for funds moving back to Accumulation

As with TTR pensions, the  Capital Gains Tax relief on funds moving back to Accumulation provides a great opportunity for superannuation funds to reset the cost base of fund assets and lock in capital gains which would currently be tax-free.  It basically means that a share you bought for $3 some years ago and now worth $25 can have its cost base increased to $25 between now and 30 June 2017 so that CGT is limited to future gains above $25.

However, while looking like a simple choice of option for everyone at first glance, there are some scenarios which require further thought if you have assets:
  1. that are currently in a loss position you may not reset the cost base for that asset;
  2. that would trigger a notional gain but are unlikely to sell an asset before you enter full account based Pension phase then you may be better not to elect for the reset.
Make sure to get personalised advice based on your fund and your future plans before making any CGT relief election and document your decisions well.


Super balance less than $1.6M?

Many people in pension phase of their superannuation look at the changes mentioned in the media and think “I don’t have more than $1.6M so nothing changes for me, right?" Well, it’s not so easy as you have to think longer term. 

What if you receive a windfall like an inheritance? How much can you contribute to Super?  We covered this off in more detail in a related post on The best super strategies for Transition to Retirement accounts.


Estate Planning

While it may not affect you and/or your spouse now, planning may be needed for when one of you passes away (read about Succession Planning for an SMSF). Any death benefit reverting to a spouse will be counted towards the $1.6M cap and a large amount of money moved into their personal names could cause major tax issues. 

You should carefully consider the use of a Reversionary pension in your funds to maximise the flexibility and time frame for making a decision after your death. A reversionary pension means the pension just automatically continues and moves in to your beneficiary’s name. Under the new rules, if a reversionary pension is in place then you have 12 months to make a final decision but without a reversionary pension in place the decision must be made a soon as practicable which is equivalent to about three months.

The 12 month option for reversionary pensioners is preferable in a time when a person may be grieving but also beneficial for the administrators and advisers to look at options.

Example: Jim & Joanne each have $1.2 million in pension and Jim dies. Only $400,000 can move to the surviving spouse under a reversionary pension as they have a $1.6M limit. That means $800,000 has to come out of superannuation. However if during the 12 months grace period, Joanne moves $800,000 of her pension back to accumulation then she can accept the full $1.2M of Jim’s death benefit as a pension. This means Joanne can keep $1.6M in tax exempt pension and $800,000 in accumulation taxed at a maximum 15%. The result is a much better outcome for those with other substantial assets outside of super.

SMSF-specific investing strategies
  1. Consider separate Self Managed Super Funds for your pension and accumulation assets. From 1 July 2017 you cannot segregate assets in your fund between those in pension and accumulation phase when calculating the tax payable. If you moved accumulation funds to a separate fund, then you could still have different types of assets supporting the pension and accumulation funds for tax purposes. Many are considering having long term growth assets like property and some cash in pension phase while having blue chip dividend paying shares with franking credits in accumulation to offset the tax payable.
  2. It’s a good time to review your asset allocation in your fund and consider the tax consequences of the changes. After 1 July 2017 many SMSF investors will no doubt be looking for tax advantaged investments but it is important you don’t lose sight of your risk tolerance
  3. Make the most of your cash. If some of your balance is going to be taxed at up to 15% then you need to make sure you have no lazy money sitting in low interest accounts / transaction accounts.  You should still keep assets required to pay pension over the next 1-4 years in reasonably liquid form but your cash allocation must be treated like any other investment in your portfolio. Don’t go chasing riskier investments with funds needed for pension payments in the short to medium term, just maximise what you can get from cash products available like High Interest Savings accounts. We went in to more detail in our post, Treat your SMSF cash as an investment and diversify it.


RaboDirect offers competitive savings accounts for established SMSFs and trusts. Find out which one is right for you.


Disclaimer: The views expressed, and any advice given, in the above article are those of the authors, and do not necessarily reflect the views of RaboDirect. We recommend that you seek professional advice before making any decisions relating to the matters discussed on this page and their related articles.