I am a 70-year-old retired single woman and own my home. According to a recent column of yours, my defined benefit State Superannuation Scheme pension (SSS) is to be multiplied by 16 for the purposes of the transfer balance cap and my self-managed super fund (SMSF) is also counted. As of today my SSS pension is $55,600 annually giving a total of $889,600 ($55,600 x 16) and my SMSF balance is $800,000, totalling $1,689,600. Have I got this right? I would need to withdraw the $90,000 from the SMSF. I would do this in two stages - $40,000 before July 1, 2017, and $50,000-plus after July 1, 2017, the latter consisting of the required 5 per cent pension, about $41,000, plus the excess above the cap, to go into my non-super share portfolio. Would this be an appropriate strategy? S.C.
The exact count for the transfer balance account of your defined benefit pension is calculated by annualising and multiplying by 16 the first fortnightly pension payment on or after July 1 2017. It is only measured once, and not affected by future indexation.
For example, if your SSS pension is $2130 a fortnight, then your daily rate is ($2130/14=) $152.142857 (using 6 decimal points seems to best match the Tax Office's examples), then multiply by 365 and 16 to get a credit of $888,514.28 towards your Transfer Balance Account.
If your SMSF has only shares, managed funds and cash, you can get a reasonably accurate valuation within half an hour over the internet. If the excess transfer balance is, as you say, $90,000, you can either withdraw it as cash or, if you don't want to, you can commute it to the accumulation phase within your SMSF. If the latter then, since you will have a total superannuation balance of more than $1.6 million, you must then divide the SMSF's fees and taxes proportionately across the SMSF for the fund's tax return. The Tax Office, in its Practice Compliance Guideline 2017/5 (on its website), stresses that you (as fund member) must contact the trustee(s) of your SMSF in writing before June 30 and request a commutation of the excess transfer balance as at June 30, even if the exact excess won't be known until then.
Above all, don't make the serious mistake of believing that a pension payment after July 1 will reduce your transfer balance account. The account measures the value of your SMSF pension as at "the end of" June 30, as the Tax Office puts it, which I take to mean the stroke of midnight. After that, fund earnings and pension payments do not affect your transfer balance. So be sure to arrange to commute the full excess before June 30.
Would you please comment on the treatment that market-linked pensions face with regards to the $1.6 million transfer balance cap? I have about $225,000 in a market linked pension with 24 years to run. On my calculation, this will be deemed to have a value of over $305,000 in my transfer balance account, leaving less room in the cap for an account-based pension. The market-linked pension is thus valued at least 35 per cent more than its apparent value. I would have thought that such a fund would be advantageous to the government since lump sum withdrawals are not permitted and hence any remaining balance will not escape the death tax. G.R.
For other readers, a "term allocated pension" is the best example of a "market-linked pension". Depending on when it was bought, the chosen fixed term could either be the person's actual life expectancy, or taken as if they or their spouse were born five years earlier, or the number of years to age 100. Pension payments, designed so the fund runs out by the end of the term, could also be varied +10 per cent. Most importantly, the fund cannot be cashed in and those bought before 2007 are partly exempt from Centrelink's assets test, and those before 2004 are fully exempt. Once that exemption was removed, so was their attractiveness.
To measure these pensions for the incoming transfer balance caps of $1.6 million, the Government has come up with a formula for a "special value" based on the first superannuation income stream benefit that you are entitled to receive on or after July 1, 2017, that is then multiplied by the remaining term, rounded up. This is best illustrated by an example.
Let's say Ms X has a market-linked pension with a remaining term of 9.75 years and the first fortnightly payment due after July 1 is $2301.37 on July 4, 2017. Her annual payment is thus $2301.37÷14 x 365 = $60,000. Rounding up the remaining term to 10 years, her transfer balance account will show a credit of $600,000. (See the ATO's website for "Law Companion Guideline 2017 / 1".)
The only example I've seen, other than yours above, also has a transfer balance higher than the current account value, so it may be built into the formula, though I'm not sure why. However, you should be able to lower the transfer value on July 1 by opting for the lowest possible pension in 2017-18.
I have successfully run our four-member, family SMSF for the last 11 years on a completely segregated accounts basis. Two of the members are in pension mode and two others are in accumulation mode. To the best of our expectations, each member will NOT reach the maximum allowable $1.6 million on July 1. However, should one member in pension mode die, there is a possibility in the future for the other to surpass the $1.6 million. I understand the remaining pension member, with presumably $1.7 million, will then have to rollover the excess of $100,000 into an accumulation account and run an unsegregated account. Is this correct? Also, is there any legal impediment, within the new regime, to continue to run our SMSF with fully segregated accounts: i.e. two members in pension mode and two members in accumulation mode? C.E.
From July 1, an SMSF will no longer be able to use the segregated assets method to calculate its exempt income during a year where the fund has at least one member with a total superannuation balance i.e. covering all super funds, of more than $1.6 million, and is receiving a retirement phase income stream from ANY fund.
In other words, upon the demise of one of your pension recipients, the entire fund will calculate its tax using the proportionate method unless the surviving spouse withdraws the excess from the superannuation system.
I must admit, I've never been enthusiastic about including the children in a pooled family SMSF as the two generations have different goals and risk profiles, so I can see how segregated funds are useful to you.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1300 780 808; pensions, 13 23 00.