Advisor Q&A: The hottest super topics
Summary: Questions and answers on the treatment of defined benefit pension schemes, non-concessional contributions and transition to retirement strategies. |
Key take-out: Couples' strategies will be one of the most crucial elements of all super strategies in years to come. |
Key beneficiaries: Superannuants. Category: Retirement. |
Defined benefit pensions, recontributions and TTR strategies seem to be the issues causing the most angst for Eureka Report's self-managed super fund army right now.
I've received many questions around the topics raised in my columns on how DB funds will be treated regarding the upcoming changes (see The new rules for defined benefit schemes, November 2016) and also regarding the removal of segregation (In defence of SMSF borrowing restrictions, December 2016) for pension funds in SMSFs.
So today I'm going to try to answer some of those. Where questions overlapped on similar topics, I've generally used the one that allowed me to cover off on the topic best, or most succinctly.
Q: At what point in time will the boffins value the DB? At the time the pension is commenced or using some method at June 30? The reason I ask is that I will commence my DB pension in February 2018 and also have an SMSF. There is no way of predicting the final pension I will receive in February 2018 as there may be pending pay rises, etc, which will affect the final pension payment amount. How can I calculate my total super balance at June 30, 2017 if I do not have a value for the DB at this date?
ANSWER: An interesting one that Aaron Dunn from The SMSF Academy helped me with.
You will be able to continue to run your SMSF pension as normal, until such time as you start to take the defined benefit pension. At the time the DB pension starts to be paid, you will then have to switch back part of your SMSF pension to accumulation.
For example, say you have the full $1.6 million in pension mode in your SMSF. In February 2018, you start to receive your DB pension of $50,000. The value of a DB pension (for the purposes of the $1.6m limit) is to multiply the pension amount by 16. So a $50,000 pension is worth $800,000. That would mean that you would have to turn back $800,000 (or in this case, half) of your $1.6m SMSF pension.
Further, if you were to start your pension with $1.6m on July 1, 2017 and it was valued at $1.7m by the time the DB was turned on, you would only have to switch back $800,000 of the SMSF pension to accumulation, leaving $900,000 in the pension.
This goes back to the fact that DB funds are valued at the top of the chain, because they can't be commuted, said Dunn.
Q: I am 71 and have an SMSF. I'm still working part-time with a taxable income of $80,000, while my wife is 68, retired, with no taxable earnings. I also receive a defined benefit tax-free pension of $100,000. Upon my death, my wife will receive that death benefit pension. In our SMSF, we are both in pension mode. My wife's current balance in SMSF is $850,000. I will have to cease my SMSF pension and transfer to accumulation mode by July 1, 2017. How much can I transfer to my wife's SMSF as a non-concessional contribution?
ANSWER: Sadly none, as your situation stands. In the horse trading that went on for the Government to get its legislation through, the plan to raise the age limits for contributions to 75 got dropped.
Yes, you'll have to turn your SMSF pension back to accumulation, because your $100,000 DB pension will be valued at $1.6m.
Unfortunately, the only way you will be able to get money into your wife's superannuation account would be to qualify for contributions under the work test rules. That is, she would need to work 40 hours in a 30-day period.
If she were able to do this in the current financial year, then she would qualify to be able to put in up to $180,000 as a non-concessional contribution to super. If she then also qualified in the FY18 year, she would be able to contribute another $100,000.
Those 65 and older aren't able to use the pull-forward provisions.
Next: Two questions about couples' super strategies, covering off on recontribution and super splitting.
Q: I have seen no discussion about the possible use of a recontribution strategy for pension accounts that exceed the $1.6m pension cap coming into effect in July 2017. A member whose pension balance exceeds $1.6m could make lump sum withdrawals and recontribute these funds to a member with less than $1.6m, providing they don't exceed the non-concessional contribution cap.
Q: I understand the benefit of super splitting with your spouse if one balance is over $1.6m. However, is there any advantage (or possible future advantage, given potential changes of government) for a retiree with a balance a little under this figure to transfer some super to their spouse with a much smaller super balance?
ANSWER: I have touched on the sorts of strategies required to help even-up super funds between couples several times. This will be one of the most crucial elements of all super strategies in years to come. And many should have already started, including by potentially using recontribution strategies.
For more information, please see columns from me here and briefly here. The first one will contain the Government's plans from the May Budget, many of which were changed, but the rough detail is still appropriate.
Specifically with regards to recontribution strategies, yes, this will make some sense, though you need to be careful around being able to get the money back into super.
Where one member with a large balance who is over 65 is coupled up with a younger member with a small balance who is under 65, this could work well. As they have hit 65, they can withdraw from their super and, assuming they can get it into the younger member's account, they will be able to put in up to $540,000 this financial year, or $300,000 in FY18 (using three-year pull forward at the new rate of $100,000 a year).
But more importantly, couples must start to even-up super balances from a younger age. This could mean using the 'spouse super splitting' strategies of moving concessional contributions from one partner to the other.
Q: I am 62 and have a transition-to-retirement (TTR) pension with super balance above the $1.6m limit. To convert the TTR to an account-based pension (ABP), you state one has to change jobs. Are you able to elaborate?
ANSWER: TTRs were once so wonderful. But since their introduction, governments have whittled away at their effectiveness. It's our fault. We saw them not for what they were meant to be (a way of gently easing out of the workforce), but for what they could be (a great way to save tax in your final years in the workforce).
The pension funds backing TTRs will be taxed from July 1 as if they were in accumulation phase. So if you wish to stop that occurring, you should take advantage of an opportunity to switch your fund from a TTR to an ABP, should you qualify.
It's less about changing jobs and more about 'ceasing an employment arrangement' after turning 60 that will allow you to end the TTR pension. One way of ceasing an employment arrangement is to change jobs. Another is to retire after hitting 60.
You might have a number of roles that you work in. You only need to cease one of those employment arrangements after hitting 60 to qualify. But make sure you get some advice from a financial advisor or accountant in this area before going ahead.
The information contained in this column should be treated as general advice only. It has not taken anyone's specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your advisor/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is a licensed financial advisor, a mortgage broker and an expert on self-managed super funds. He is a regular contributor to Eureka Report. To contact Bruce, please click here.