Super changes reset the TTR clock

The new $100,000 annual NCC limit makes the timing of transition to retirement strategies more important.

Summary: Members will still have the three-year pull-forward provisions, but won't be able to make NCCs once a total super balance of $1.6m has been reached.

Key take-out: The impact on TTR strategies of the switch back to an annual limit of $100,000 will be important from a taxation perspective and for couples.

Key beneficiaries: Retirees, superannuants. Category: Superannuation. 

The Government's backward double twist routine into the "new, new rules" for superannuation have reset the clock on a number of super strategies.

This includes transition to retirement (TTR) strategies, making them a whole lot more relevant again.

Somewhat like a stock pick, I downgraded the TTR strategy in this piece, The biggest hit to Aussie super savers (August 3), as they were going to get tougher to make workable under the now dumped "new rules". And that was without making great mention of the $500,000 lifetime non-concessional contributions (NCC) limit, which has now also gone.

The new replacement rules drop the $180,000 NCC limit to $100,000 a year. Members will still have the three-year pull-forward provisions, but won't be able to make NCCs once a total super balance of $1.6 million has been reached.

(Note: Importantly, members will still have access to the $180,000 and pull-forward rules for this financial year. The "new, new rules" don't come into force until July 1 next year. So, anyone looking to use those rules this year needs to put due consideration into whether they still can. And then act on them.)

To register for this week's advisor Q and A session with Bruce Brammall and Carol Tawfik on Thursday September 29 at 12:30pm, click here. 

The main impact on TTR strategies hasn't changed TTR pension funds will start to pay tax from July 1, 2017. (And pension payments will remain tax-free for the over 60s.) And tax will need to be paid until such time as they can be made an account-based pension (ABP).

This occurs automatically at age 65, when you hit that condition of release. Importantly, for many others, it will also occur when you hit another important condition of release, such as ceasing an employment arrangement after turning 60.

Previously, as TTR pension funds weren't taxed, getting the switch to an account-based pension wasn't overly important, unless you wished to also have your superannuation switched to "unrestricted non-preserved", allowing full access to your super and pension account balances.

The impact on TTR strategies of the switch back to an annual limit of $100,000 (effectively asset-tested at $1.6 million) will be more important.

TTR and recontribution to spouse

This will be most useful for couples who have very uneven super balances. And blends in with parts of this column: Super strategies to use now, May 18.

Let's assume one spouse (Drew) has $2 million in super and the other spouse (Sam) has only $300,000. They're both aged 62.

Drew decides to turn on a TTR pension this financial year (FY17).

For this financial year, it might make sense to draw a full TTR pension of $200,000 (maximum of 10 per cent) out for Drew and then have it contributed to Sam's account as a non-concessional contribution.

Ahead of next financial year, that would reduce Drew's balance to $1.8m and increase Sam's balance to $500,000.

Depending on growth, Drew might still have to pull $200,000-$300,000 back from pension to super in FY17, depending on how far over the $1.6m transfer to pension (TTP) cap they are.

The following year …

Drew might not want to take the full 10 per cent pension in FY18, as this would be drawing down funds too quickly. But if taking a 4 per cent pension, on roughly $1.9m (assuming a small amount of earnings), then drawings of $76,000 would be required.

Drew has already started a $1.6m pension, so won’t be able to contribute further. It could, however, be contributed to Sam’s account.

If $200,000 had been contributed to Sam's account in the current financial year, then the pull-forward provisions would have been pulled into play for FY17, FY18 and FY19.

Importantly, it appears that if you don't use the full $540,000 for the bring-forward rules this year, you will be limited in your bring forward to $180,000 (for FY17), plus $100,000 each for FY18 and FY19. A total of $380,000 as a bring-forward limit.

If less than $180,000 from FY17 was contributed to Sam's account, then Sam could potentially use another $300,000 in contributions for FY18, FY19 and FY20. Any remaining cash, plus this $76,000 ($176,000 total) could be contributed to Sam's account, with a view to contributing up to $300,000 between FY18 and FY20.

Drew will have had to reduce the pension account from what was in excess of $1.6m by July 1, 2017, so potentially around $200,000-$300,000 will have gone back to super.

It is likely that money will have to stay paying tax in super until Drew reaches 65 or ceases work in the current employment arrangement. At that time, the money could potentially be withdrawn from super. It might (or might not) make sense to use some of those funds to further increase Sam's super accounts at that time also.

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 adviser/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.

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