From 1 July 2017, there will be a limit on how much of your super you can transfer from your super account to a tax free pension account. This limit, announced as part of the 2016 Federal Budget, is known as the ‘transfer balance cap’.
New and existing pension accounts that support your tax-free retirement income will be counted towards the transfer balance cap.
If you already have more than $1.6m in assets supporting your pension you’ll need to remove the excess. If your balance is between $1.6m and $1.7m on 1 July 2017 you’ll have until 31 December 2017 to comply with the new rules. If you have more than $1.7m, you’ll need to act before 1 July.
You can reduce your pension balance either by rolling the excess amount back into an accumulation account – where you’ll pay 15% tax on any earnings – or investing it outside of super – where you’ll pay your personal rate (ranging from 0% to 47%) on any earnings.
There is no limit on the amount of money you can have in your normal accumulation super account where earnings are taxed at 15%.
Capital gains tax relief is available if you have to move an asset from pension to accumulation phase in order to satisfy the $1.6 million transfer balance cap.
Whether you choose to roll your additional funds back into super or invest elsewhere depends very much on your personal circumstance – particularly your income outside of super – and is something you should speak to a financial adviser about.
If you start a pension after 1 July 2017, your opening balance will be restricted to $1.6 million. Later earnings are not included in the cap so your pension account can grow over time to more than $1.6 million.
If you’d like to speak to a Mercer financial adviser call 1300 850 580, or book an appointment today.
Transition pension earnings no longer tax-free
From 1 July, popular transition to retirement (TTR) accounts will lose their tax-free status so earnings will be taxed at 15%, just like a normal super account.
The tax on the income you draw from your TTR will stay the same – your marginal tax rate less 15% if you’re under 60 and tax-free if you’re over 60 – but the tax on earnings means the argument for a TTR strategy after July 1, 2017 is not as compelling, particularly for those on high incomes and those aged under 60-years.
But if you started a TTR because you wanted to work less hours and supplement your income, or because you needed money to pay down some debt, then it might still be the right for you.