What the $1.6 million pension cap means for you - MGD
30 November 2016

As part of their controversial suite of proposed changes to superannuation put forward in May, the Coalition announced a cap of $1.6 million on all existing and new pension accounts. Last week, these changes passed through Parliament and are now Law.

It’s worth noting from the outset that there has already been a number of changes made to the Coalition’s original superannuation overhaul since Budget night, including the scrapping of the $500,000 lifetime cap on non-concessional contributions in September. The $1.6 million pension cap will come into force from 1 July 2017 and will be subject to indexation in increments of $100,000.


What does this mean for you?

It is important to take the time to understand what the changes mean to you, especially as we inch closer to the implementation date.

If you have pension account/s on 1 July 2017, you will need to ascertain the total value of your pension interests and compare this amount to the cap. If the value of your pension assets exceed $1.6 million on 1 July 2017, then you will have to withdraw any excess (see options below). Please note, the cap will be applied to each individual, not each account. If you have multiple pension accounts, then the sum of the assets is what will be considered.

If by 1 July 2017 you have pension phase assets in excess of $1.6 million, you have two options:

1. Transfer the excess from your pension account/s back to the accumulation phase superannuation account. This will result in the assets attracting a 15% tax rate on earnings.


2. Withdraw the excess from your pension account/s and invest it outside superannuation where earnings will be taxed at your individual marginal tax rate.


If you don’t have pension account/s on 1 July 2017, you can transfer up to $1.6 million from accumulation into pension phase when you retire, subject to the standard eligibility criteria.


If your pension fund contains more than $1.6 million on or after 1 July 2017, the amount over the cap will be subject to an ‘excess transfer balance tax’ of 15%. If the situation is not rectified within a reasonable period, additional penalties may apply.


Transitional arrangements

With the above being said, to allow individuals a period of transition, the draft legislation will permit those with up to $100,000 over the $1.6 million cap 60 days from 1 July 2017 to rectify the situation without the ‘excess transfer balance tax’ being applied.

In regards to capital gains tax (CGT), self-managed superannuation fund (SMSF) trustees are able to reset their cost base on assets currently supporting pensions on 1 July 2017, meaning funds will not have to pay CGT on capital gains made on these assets prior to the start date should they have to roll them back to accumulation phase to meet the new cap. In the event that these assets are already partially supporting accumulation phase accounts, CGT will be paid on this portion.


Reversionary pensions

In the event of reversions, if the pension balance exceeds $1.6 million after the pension has been transferred to a nominated reversionary beneficiary, the excess could either be reallocated to accumulation phase or taken out as a lump sum. Despite this, there are still circumstances where reversionary pensions are beneficial, such as:

1. The ability to bequeath grandfathered social security changes from before 1 January 2015.


2. In the instance an individual has both a significant tax free component and a life insurance policy in their fund.


Segregated assets

When it comes to segregated assets, an SMSF trustee may obtain CGT relief to reset the cost base of the asset to its market value, provided the asset ceases to be a segregated asset prior to 1 July 2017. The market value is determined immediately before the asset ceases to be a segregated asset. An asset ceases to be a segregated asset when it is transferred from pension to accumulation phase or when it is treated as an unsegregated asset.

It is important to note that SMSFs or small APRA funds with at least one member in pension phase with a fund balance exceeding $1.6 million will not be granted the opportunity to make use of the segregation method.

It is important to consider your options sooner rather than later. We are here to help, if you wish to discuss your options or if you would like to discuss your retirement strategy more broadly. Please don’t hesitate to give us a call on (07) 3391 5055 to speak with our team of specialists or write us at advice@mgdwealth.com.au.

This article contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice. MGD Wealth, AFSL 222600.