The story of Bettie and Bob

|by Anne Turner|Self Managed Super Funds

**Relevant Information **

Bettie is 60 and Bob is 65.

They have an SMSF. Bettie’s balance is $500k and Bob’s balance is $2m.

Bettie’s benefits are held as a Transition to Retirement Income Stream and Bob’s is held as an Account Based Pension.

They are both still contributing to super.

** The Original Plan **

Bettie and Bob are transitioning into retirement. Their son, Charles, is taking over Bob’s plumbing business. Bettie will continue to work for the business for a few more years.

They would like to retain their wealth in the super environment and, for this reason, they elected for the income stream and the pension to be reversionary. This means that, when either of them passes away, the pension would continue, with the pension payments being made to the surviving spouse. It would not be necessary for the benefits to be cashed out of the fund until the remaining spouse dies.

** The $1.6m pension transfer balance cap **

From 1 July 2017, a limit will be imposed on the total amount that a person can transfer into a tax-free pension phase account. This limit is initially set at $1.6m, but will be subject to indexation.

Bettie’s balance is significantly less than the cap. Furthermore, she is not being paid an account based pension, which means the pension transfer balance cap (on the face of it) does not apply to her. Bob’s account based pension, however, must be reduced to $1.6m or less to comply with the new rules.

** What should he do? **

He could simply transfer a portion of his pension back to the accumulation phase (known as a partial commutation).

He could withdraw any amount over $1.6m as a lump sum payment from the super fund and retain the rest in his account based pension.

Option 1 would allow the benefits to remain in the super fund. However, withdrawing the excess amount may be an attractive option for Bob, especially if Bettie can make a non-concessional contribution of a similar amount. The lump sum would be paid tax free to Bob as he is over 60, while the non-concessional contribution will boost Bettie’s balance.

** Both the options need careful consideration. **

The Transition to Retirement Income Stream (TRIS)

Bettie’s income stream is not subject to the $1.6m pension transfer balance cap, and would not have been even if it was valued at more than $1.6m on 1 July 2017.

However, from 1 July 2017, the income on assets supporting a TRIS will no longer be exempt from tax. An actuarial certificate would be needed to establish the extent to which the fund will be taxable in any given year. The taxable portion will be taxed at 15%.

When Bettie meets a condition of release, her benefits will be paid to her as an account based pension and, at that time, her pension benefits must comply with the pension transfer balance cap, which may be an amount larger than $1.6m. The income on the assets supporting her pension will again be exempt from tax.

** Reversionary pensions **

The changes to the super rules will impact on Bettie and Bob’s plan to retain their wealth in the super environment.

** What happens upon death? **

On the face of it, Bob would have to cash out Bettie’s super benefits upon death. He has, after all, made full use of his pension cap. But are there other options?

Could he, for instance, partially commute his own pension and receive all or part of Bettie’s benefits as a reversionary beneficiary? This would allow him to retain some of Bettie’s benefits in super while capping the tax on the income in his accumulation account to the concessional rate afforded super funds.

And what if Bob was to pass away first. Could Bettie employ a similar tactic to lengthen the time that assets are held in super?

There is no definitive answer to this question as it is subject to the caps in place, the value of the pension balances, whether any lump sum withdrawals had been made and the personal circumstances at the time.

** Conclusion **

The above illustration is meant to clarify the impact of the $1.6m pension transfer cap and the changes to the tax-exempt status of Transition to Retirement Income Streams.

Something that cannot be ignored is the impact on death benefits and therefore highlights the need to review the implications from an estate planning perspective.

There are so much more to consider. This article only touches on some aspects to provide some food for thought.

Every individual will have unique circumstances that need to be considered, and there are other matters to consider, such as the application of CGT relief.

**My advice? **

Contact Cordner Advisory and obtain advice on how to address the forthcoming changes and its effect on your SMSF. Do not wait until after 30 June, because then it may well be too late.

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