Confused over the proposed new $1.6 million dollar pension cap?

pensions cap

The government has proposed that an individual may only have a balance of $1.6 million in a tax free superannuation pension. 

What does this mean in practice?

Currently, as far as the SMSF or in fact any superannuation fund is concerned the earnings on investments supporting a member’s pension are tax free without any maximum limit; this is known as the Exempt Current Pension Income (‘ECPI’) exemption. The proposed pension cap change will limit the amount of the  ECPI of each member to $1.6 million.
This will still apply to the subsequent earnings (or losses as it happens) on the pension that started with a balance cap of $1.6 million.

superannuation-capAmounts in excess of the balance cap may remain in superannuation but will revert to accumulation phase. Earnings during the accumulation phase are taxed at 15%, with 10% applying to net capital gains on assets held for more than 12 months (this is the 1/3 discount that applies to super funds).  The main area of change here will be that any benefits that are in accumulation must be cashed and withdrawn from superannuation upon the death of a member, whereas there is a capability of having pension benefits revert to a spouse.
Members already in the retirement phase with balances above $1.6 million will be required to reduce their pension account balance to $1.6 million by 1 July 2017.

If a pension commences or continues with amounts in excess of the cap a tax on the excess will be applied and the treatment will be similar to the tax treatment that applies to excess NCCs. Excess amounts will need to be transferred to accumulation phase or withdrawn, and tax paid on the associated earnings after allowing a 15% tax offset.

The balance cap remaining for a member seeking to later commence a second pension will be determined by apportionment. This usually means that if a member only uses part of their balance cap, they can utilize the remaining balance cap and if the cap has been indexed, they obtain a proportionate increase to their remaining cap. The $1.6 million balance cap will be indexed in $100,000 increments in line with CPI.

There is a lot more to iron out with these new proposals.  For example it is unclear how these changes will affect what happens to pension reversions if a member passes away and wishes the pension to revert to their spouse?  Potentially this may not be allowable as the second pension may exceed the pension cap.

Liz Gibbs

 

 

 

 

Liz Gibbs – SMSF Manager

 

 

Confused over the proposed new $1.6 million dollar pension cap?
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