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Changes to pensions in Federal Budget

May 5, 2016Federal Budget, PensionsBy Aaron Dunn

The Government has made important announcements within the Federal Budget that reset the framework for individuals drawing pensions from their superannuation. Some of these measures to be introduced from 1 July 2017 come off the back of recommendations from the Financial Systems Inquiry (FSI) which focus on setting an objective for superannuation ‘to provide income in retirement to substitute or supplement the Age Pension.’

The video and information below outline the impact of these new measures:

 

 

 

It is clear that the Government is resetting the rules for paying pensions as part of their approach to setting an objective for superannuation.  They have been quite resolute in their messaging that superannuation is not an estate planning tool.  In the budget, this was delivered in a loud and clear message…

From 1 July 2017, we will see an introduction of a $1.6 million transfer balance cap on amounts moving into pension phase.  Subsequent earnings on these balances will not be restricted (i.e. they can grow or reduce accordingly). As a result of this measure, it significantly limits the extent of exempt current pension income (ECPI) applying to assets supporting the payment of pensions.

According to the Government, it better targets the sustainability and fairness of tax concessions within super. Where a member has a balance in excess of $1.6 million, they will be able to maintain this excess within superannuation, however it cannot be transferred into the post-retirement cap.  As a result of it remaining in accumulation phase, a 15% tax rate will apply to fund earnings the accumulation benefit generates. Importantly, this measure does not grandfather existing pensions.

For members already in retirement phase whose balance is above $1.6 million, they will be required to reduce their pension balance to $1.6 million by 1 July 2017.  Excess balances for these members may be converted back to accumulation. Failure to comply with this balance transfer cap will mean that the member will be subject to an excess transfer amount (including on earnings), similar to how the treatment of excess non-concessional contributions tax applies. Consultation with industry will be undertaken on these measures.

Integrity of Transition to Retirement rules

The Government has been concerned about the abuse of the transition to retirement strategy for some time.   In reality, the outcomes of the strategy have been dramatically extended beyond its original policy intent.  

To address this issue, the Government from 1 July 2017 will remove the tax exemption on fund earnings from assets supporting a transition to retirement income stream (TRIS).  In addition to this change, it will also remove the ability for a member to elect under Regulation 995-1.03 of the ITAR to have the payment treated as a lump sum for tax purposes.

Removal of anti-detriment payments

Anti-detriment payments are not commonly used within SMSFs.  They are a top-up payment on a death benefit paid to beneficiaries effectively clawing back contributions tax paid since Paul Keating introduced tax on contributions back in 1988. The removal of this tax saving amount provision from 1 July 2017 will mean that death benefit payments will be better aligned across all super funds, along with bequests made outside of super.

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About the author

Aaron

When it comes to self-managed super, people look to Aaron to learn the in and outs and key strategies to grow and preserve retirement wealth. Highly admired amongst his peers, Aaron’s enriched insights into the industry are helping to grow the most popular sector of a trillion dollar super industry. It is with this insight that Aaron has been sort out to participate in Government reviews, along with him regularly shaping conversation on SMSFs within the financial services media. As a CPA and SMSF Specialist, Aaron supports trustees and advisers with key strategies, along with SMSF administration and compliance services.

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