Issue Number 31
July 2017

The new super rules have arrived – a case study

Much has been written over recent months regarding the upcoming super changes that commenced from 1 July 2017. The most significant change has been to limit the amount a person can hold in a pension account to $1.6m, any amount over this needs to be transferred back into the accumulation phase of super or drawn out of super altogether. The intention of this change is to limit the amount clients can hold in the tax free pension phase and also to limit the amount of pension income that can be drawn down as a tax free pension.

On the surface this is bad news for clients with pension accounts in excess of $1.6m. However in many instances people in this situation may not be that much worse off. Let’s look at an example. 

Jack and Mary are both 66 years old and Jack has $3 million in his pension while Mary has $2 million in her pension. Their funds are invested in diversified portfolios that have provided long term returns of approximately 7% per annum. Based on the new rules, they are respectively $1.4m and $400k over the Transfer Balance Cap (TBC). They each also have approximately $50k income from sources outside super. They have annual expenses or cost of living of $200k p.a.

Recap: Prior to 1 July 2017

Under the previous arrangement they received approximately $83k net from their income outside of super. They then received compulsory pension incomes of $150k and $100k pa. giving them a combined total income of $333k pa.

They were required to draw down $133k of pension income that they do not require. As they cannot contribute this money back into super it moved from being in a zero tax environment generating a return of 7% to moving into their bank accounts where it earns approximately 1.5% pa and then they pay tax on it at 34.5% including Medicare. This resulted in a net return of approximately 1% pa.

Super arrangements from 1 July 2017

Under the new arrangements they each have a pension of $1.6m and will each draw an annual income of $80k as well as their income from outside super for a total income of $243k. This is $43k more than they need. Importantly they now have $1.8m still in super (accumulation phase) that they do not need to draw a pension from, this keeps $90k pa in super where it is taxed at a maximum of 15% rather than their rate of 34.5%. Also, these funds remain invested in a diversified manner generating a return of 7% rather than going to a bank account earning a return of approx. 1.5%.

The funds in super can potentially keep growing in a concessional tax environment rather than being forced out to the client to be taxed at their marginal tax rate.

To find out more about how best to structure your superannuation and overall retirement arrangements contact your McLean Delmo Bentleys Advisor.

Michael Lavery
Director Financial Planning
AFS Licence Holder Number 245558

Important: This is not advice. Clients should not act solely on the basis of the material contained in this newsletter. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly.

We therefore recommend that our formal advice be sought before acting in any of the areas. This document is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.

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