Implications for Super Fund Exceeding the $1.6m Threshold

We are in a income stream phase with an industry fund at the moment, and are still in doubt about the implications of our super fund eventually exceeding the $1.6 million threshold.

We believe that our fund must not exceed the threshold by D-Day, but will be OK to grow passed the threshold after that date.

Are we right? Like most retirees, we are in the dark about the ramifications of the changes as they approach and would appreciate a lay answer.

A: Thanks for the question.

Firstly, the transfer balance cap (of $1.6m) applies per member – not per  fund. What are your individual balances?

Your individual transfer balance caps will be measured at 30 June this year. If your only super assets are in the pension phase with this industry super fund and are less than $1.6m, you will not need to take any action. After 30 June, you also won’t need to take any action. Your super assets can continue to grow (ie from earnings). Earnings do not count as part of the cap.

If you have other super assets (for example, funds in the accumulation phase), or monies outside super that you could contribute to super, you will be limited to how much you could move into the pension phase.  The new contribution, together with the amount you had above at 30 June 17 in the industry super fund, can’t exceed $1.6m.

Here is the ATO’s attempt to explain it:

As part of the 2016 Budget, some changes were introduced to make superannuation fairer and more sustainable.

The transfer balance cap applies to the total amount of superannuation that has been transferred into the retirement phase. It does not matter how many accounts you hold these balances in.

The amount of the cap will start at $1.6 million, and will be indexed periodically in $100,000 increments in line with CPI. The amount of indexation you will be entitled to will be calculated proportionally based on the amount of your available cap space. If, at any time, you meet or exceed your cap, you will not be entitled to indexation.

You will be able to make multiple transfers into the retirement phase as long as you have available cap space.

Each individual with superannuation interests in the retirement phase has a personal transfer balance cap. The cap cannot be shared with any other person. To determine your position with respect to the transfer balance cap, you have a transfer balance account. This tracks the net amounts you have transferred to the retirement phase.

The transfer balance account works in a similar way to a bank account. Amounts you transfer to, or are otherwise entitled to receive, from the retirement phase give rise to a credit (increase) in you transfer balance account. Certain transfers out of the retirement phase give rise to a debit (decrease) in your transfer balance account.

The transfer balance cap will affect you if you are currently receiving a pension or annuity income stream that is close to or in excess of the cap, or start a retirement phase income stream after 1 July 2017.

If you are currently receiving a pension or annuity, you will need to speak to your superannuation providers about the likely value of your income stream as at 30 June 2017. Check how you can reduce the value of your income stream before 1 July 2017 to ensure you do not have an excess.

If you will commence a retirement phase income stream after 1 July 2017, you will need to:

  • ensure that your account based pensions and annuities do not exceed the $1.6 million transfer balance cap
  • include income from certain lifetime pensions (usually paid from a defined benefit fund) in your income tax return if you are over 60, and may need to pay more tax
  • ensure that if you have a mix of pension types, with a total value exceeding $1.6 million, you reduce any account based pensions to reduce the total value of all your pensions below the transfer balance cap.

Although there is now a limit on the amount of assets you can transfer into a tax-free retirement phase account, this does not affect the amount of money that you can have in the accumulation phase of a superannuation fund. Any amount of superannuation you have in your fund above the $1.6 million amount can be retained in the accumulation phase and/or be taken as lump sum payments.

See also:

What counts towards your cap

The cap limits the amount that you can transfer into retirement phase to start a pension or annuity over the course of your lifetime. This is no matter how many accounts you hold or how many times you transfer money into retirement phase. The cap also includes the value of pensions or annuities you may start to receive for some other reason, for example:

  • your spouse has died and you are receiving, or start to receive, a pension from their superannuation
  • your former spouse has been ordered to pay you a portion of their pension income stream as part of a family court settlement.

The cap does not apply to any subsequent growth or losses. This means that:

  • if you start a pension with $1.6 million and the value of that pension grows to $1.7 million, you will not exceed your cap
  • if you start a pension with $1.6 million and the value of that pension goes down over time as you use it to live on or you suffer losses, you can’t ‘top up’ your pension accounts – you will still be able to access other superannuation amounts you may hold in accumulation phase by taking these as a ‘lump sum’.

The transfer balance cap will also apply to future ‘innovative’ income stream products.

Transition to retirement income streams (TRIS) will not count towards your transfer balance cap as from 1 July 2017.

When calculating if you have exceeded your cap, we will subtract the value of any structured settlement contributions you’ve made.

Special rules apply to child death benefit beneficiaries.

Find out about:

 

Regards


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