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SUMMARY: The reversion to a $100k annual NCC limit has improved the relevance of transition to retirement strategies.
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 strategies, making them a whole lot more relevant again.
Somewhat like a stock pick, I downgraded the TTR strategy in this piece (3/8/16), as they were going to get tougher to make work under the now dumped “new rules”. And that was without making great mention of the $500k lifetime non-concessional 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 total super balance of $1.6m 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 1 July 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.
The main impact on TTR strategies hasn’t changed – TTR pension funds will start to pay tax from 1 July 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 (18/5/17).
Let’s assume one spouse (Drew) has $2m 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%) 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 $200k-$300k 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% pension in FY18, as this would be drawing down funds too quickly. But if taking a 4% 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 $100k each for FY 18 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 $76k ($176k total) could be contributed to Sam’s account, with a view to contributing up to $300k between FY18 and FY20.
Drew will have had to reduce the pension account from what was in excess of $1.6m by 1/7/17, so potentially around $200-300k 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.
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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 managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au . Bruce’s new book, Mortgages Made Easy, is available now.