21 Feb 2017
In its May 2016 Federal Budget, the Government proposed a $1.6 million cap on the total amount of super that can be transferred into the retirement phase from 1 July 2017. This has now cleared parliament and the Government has since outlined how this cap will apply to those with defined benefit pensions, which we explain in this brief overview.
Members with a defined benefit pension
Rather than the value of your pension being determined by the transfer balance cap, any defined benefit pension income that exceeds $100,000 (per year) will be:
- included in your assessable income, and
- potentially subject to income tax.
For example, if your annual pension income is $120,000, half of the $20,000 excess amount (i.e. $10,000) will be included in your assessable income and we may be required to withhold some tax from your pension payment.
You can learn more about the Government’s new super changes in a series of fact sheets on the Treasury's website.
You can also read our overview of the changes or watch our Budget webcast anytime to learn more about these and other super laws that may affect you.
Members with a defined benefit pension and an account-based pension (like a Flexi Pension)
Members who have already retired—or who retire before 1 July 2017—will be required to reduce the total amount of super they have in the pension phase below the transfer balance cap by 30 June 2017.
If you have both a defined benefit pension and an account-based pension, special rules will apply to determine their combined value under the cap.
The Government’s draft legislation includes rules for working out a ‘special value’ for defined benefit pensions. This translates to your annual defined benefit payment amount being multiplied by 16 to determine its special value.
Consider this example.
On 1 July 2017, Angela’s a UniSuper member with Defined Benefit Indexed Pension (DBIP) paying an annual income of $120,000. She also has $400,000 in a Flexi Pension.
Under the new rules, Angela’s combined pension value would be calculated as follows:
Angela’s annual DBIP income of $120,000 would be multiplied by 16 to determine its ‘special value’, which equates to $1,920,000 (i.e. $1.92 million).
Because the special value of Angela’s DBIP exceeds the $1.6 million transfer balance cap, the $400,000 she has in her Flexi Pension will become subject to penalty taxes.
So, Angela would need to:
transfer $400,000 of her Flexi Pension balance back into an accumulation super account, or
withdraw $400,000 from the super system completely (e.g. take it as a lump-sum amount) and consider investing it outside the super system), or
a combination of both, to remove $400,000 from the pension phase.
In addition, because Angela’s annual DBIP payments are $120,000, half of the $20,000 excess amount (i.e. $10,000) will be included in her assessable income and we may be required to withhold some tax from her pension payments.
This is a ‘whole of life’ cap for each person, meaning you can’t start a new pension against a new cap if you use up the balance of your first pension.
Members planning their retirement
Now that this has been legislated, we recommend members planning to retire to carefully consider the amount they'd like to transfer to the pension phase—because exceeding the transfer balance cap will incur penalty tax.
While there are no restrictions on the amount that you can transfer to a defined benefit pension, we recommend you speak to a qualified financial adviser to determine an appropriate contribution and pension strategy, along with any tax consequences that may apply.
Advocating on your behalf
The Government recognises that these measures are complex and has consulted the super industry at each stage of drafting the legislation.
To achieve good outcomes for our members, we’ve made a number of submissions on the draft legislation, highlighting some concerns with the Government's changes—particularly around how defined benefit pensions are valued under the special value rules described above.
You can read our submissions if you’d like to know more about the concerns we’ve raised.
We’ll continue to monitor developments as they occur and we’ll keep you informed through our website, seminars and webcasts, as well as emails and news updates.
In the meantime, if you’re concerned about how these changes may impact you personally, we encourage you to speak with a qualified UniSuper financial adviser. You can email UniSuper Advice or call us on 1300 331 685.