If nobody in your self-managed superannuation fund (SMSF) receives a government pension allowance, you would be affected by the proposal to stop franking credit refunds, says Sam Henderson, who answers your questions on super.
Q: Hi Sam, in Your Questions in AFR Weekend, April 7-8 (How franking plan hits SMSF pension), you note the Bill Shorten proposal to stop the refund of unused franking credits "does not exclude those in account-based pension phase". My wife and I are in our 60s and commenced account-based pensions in 2013 following retirement from employment. Our self-managed superannuation fund is largely invested in equities/hybrids, thus we rely substantially on cash refunds of franking credits. Each of our account balances is below $1.6 million. We have never drawn a Centrelink full or part age pension and would be precluded from doing so by the assets test. In the same AFR Weekend paper, Joanna Mather's article (When $1 million is worth less than $500,000) says "Self-managed super funds with at least one member in receipt of a pension on or before March 28, 2018 were also quarantined". My apologies if I have missed something, but please clarify our franking credits position and comment on our strategy for the future. Stuart
A: Stuart, you make an important point that many fellow retirees do not clearly understand. I know this because I've received scores of emails asking similar questions despite the quantum of articles on the topic.
Let me elaborate by first quoting Joanna Mather's fantastic article last weekend that illustrates how people with less assets can receive greater incomes by being on the age pension.
Joanna explains the changes to Bill Shorten's original policy: "This guarantee means everybody receiving a government age pension or entitlement will still get refunds." She goes on to say, as you rightly quoted in your question, "Self-managed super funds with at least one member in receipt of a pension on or before March 28, 2018, were also quarantined."
As you can see, the sentence preceding your quote makes the point that the exclusions to the Labor policy of not allowing cash refunds of franking credits applies only to those in receipt of a government age pension or entitlement (the Pensioner Guarantee) – not an account-based pension.
By definition, this is quite different to an account-based pension. I suspect you were hoping that Labor would grandfather (ie, exclude those already with an account-based pension) from the policy. Unfortunately this is not the case.
John Maroney, CEO of the SMSF Association, goes on to reiterate the policy and his sentiments with regards to the SMSF sector: "Under Labor's proposal, the only SMSFs exempt are those that currently have at least one member receiving the age pension. And in the future, there will be no protection for SMSF retirees who may need part government support to supplement their superannuation income, creating an unfair, two-tiered and complex treatment of SMSF members who access the age pension in retirement."
Maroney says the Pensioner Guarantee exacerbates the effect of Labor's proposal on SMSF members who have saved to be self-sufficient and avoid relying on the pension.
"Potentially, these SMSF members are worse off than people with less savings but refundable franking credits and a part pension. The end result is to reduce people's incentive to save for retirement to achieve self-sufficiency."
The only way to stave off the effects of this policy is to let your sentiments be known at the next election – expected between now and May 2019.
Q: I am 61 and in SMSF pension phase and my wife is 49 and in accumulation phase. I own 60 per cent of the fund. I would like to know if I am still able to claim back my franking as i am well under the $1.6 million cap and on no government help. We look like losing $15,000 per year if Labor is elected. We are hoping with Labor's backflip, we might be one of the lucky ones exempt. Can you confirm if we would keep or lose our franking credits as our advisor said because Ii am in pension phase already we would retain them. Wayne
A: Sorry Wayne, you're in the same category as Stuart in the first question if you're not in receipt of an age pension or Centrelink or government entitlement. You'd be best served by not voting Labor in the next election or reviewing your investment strategy. I truly feel for you and do hope you get some strategic portfolio advice on the matter to ensure you can optimise your income if Labor wins power.
Q: Sam I am 64, do occasional part-time work, and intend to continue doing so for some years. As my super is over the $1.6 million cap, I have a pension account and an accumulation account. Can I make personal concessional contributions to the accumulation account, as long as I meet the work test and stay within the $25,000 total concessional contributions limit? Michael
A: You're all good Michael! Yes, you will be limited to making only concessional contributions up to the concessional contribution limit of $25,000 per annum under current policy. Once you're over 65, you will have to meet the work test – which is undertaking eligible employment of at least 40 hours in 30 consecutive days. You do not need to meet the work test if you're under 65, as you are now.
You will not be able to make non-concessional contributions as you exceed the $1.6 million maximum superannuation cap limit.
These answers must be taken as general advice only. Financial planner Sam Henderson is CEO of Henderson Maxwell (www.hendersonmaxwell.com.au). Published questions will win a free copy of Sam's book The One Page Financial Plan (Wrightbooks, RRP $29.95) – please include your mailing address. Email: firstname.lastname@example.org
By Sam Henderson
11 April 2018