From July 1, superannuants will be prohibited from making after-tax contributions if they have $1.6 million or more in super, writes Sam Henderson, who answers your questions on superannuation.
Sam, my question relates to concessional contributions. I am 65. My pension account in my self-managed superannuation fund at June 30 is estimated to be $1.55 million, and my accumulation account will have $120,000. Can I still make deducted contributions (with the work test) in future years, or will I have to reduce my total super balance down to, say, $1.5 million to contribute the maximum $25,000 a year for the next four years? Rob
Rob, from July 1 you'll have a pension transfer balance cap of $1.6 million. Assuming your estimate is correct, you will be deemed to have used $1.55 million of your available pension transfer balance account.
You will therefore be able to transfer an extra $50,000 of your available pension transfer balance cap into pension phase. The $1.6 million cap will be indexed to CPI and will rise in increments of $100,000. This means it will take a while until your transfer balance cap rises, and your $50,000 may be pro-rated.
You will be able to maintain $120,000 in the accumulation phase for as long as you like and any further concessional contributions will be added to that account. Yes, you will be able to make annual concessional contributions of $25,000 from July 1, even if you exceed the $1.6 million transfer balance account cap.
You cannot make any further non-concessional contributions from July 1 if your transfer balance account reaches the $1.6 million cap. This is the key reason we are advising some clients to maximise their non-concessional contributions before June 30, as this will be their last opportunity to make significant contributions to super. I hope that helps.
Sam, I will turn 60 in November this year. I will receive a defined-benefit pension of about $80,000 a year, plus I will have other super savings in an accumulation account. I will transfer funds within the transfer balance cap to maximise the tax-free status of my super accounts. My intention is to retire, and not work more than the 10 hours a week I understand is allowed. I have been told, however, that I can change my mind and take on more work at some time in the future. I am not clear on what this means for tax. It would be great if the answer is that I can preserve the money in the account-based pension account inside the transfer balance cap, and retain the ability to receive the associated pension payment on a tax-exempt basis. My concern is that there is a rule that changes the tax status of super in the account-based pension. If that is the case, the marginal tax rate of any additional income would obviously be pretty high. Can you explain the tax issues if I decide to work more than 10 hours a week? Tony
Tony, once you have attained a condition of release and commenced an account-based pension, it can continue in perpetuity no matter what circumstances change as long as you don't exceed the pension transfer balance cap of $1.6 million. If you want to return to the workforce, your account-based pension can remain in place with its existing tax exemptions, as you're over 60.
Importantly, you need to have attained preservation age (currently 56 but moving to 60 progressively) and have the genuine intention of ceasing work at the time of retirement. Retirement is less than 10 hours' work. This doesn't preclude you from changing your mind down the track and returning to the workforce and accumulating more super, while maintaining your original account-based pension.
Further concessional contributions can be placed into an accumulation account and potentially be converted into another account-based pension when another condition of release has been met. It sounds as though you'll be headed towards your pension transfer balance cap soon, so perhaps you could consider super-splitting with your wife, or a recontribution strategy to rebalance accounts if you're married or partnered.
Remember, your defined-benefit pension is multiplied by 16 and then you add any additional super money you have to calculate your total pension transfer balance cap.
It's common to have multiple account-based pensions. Assuming you're under the pension transfer balance cap of $1.6 million after July 1, the second account-based pension will also remain tax-free if you're over 60.
The tax issues are minimal for your current circumstances, but if your situation or the rules change, it's always worth getting advice.
03 May 2017
The Finacial Review