When the new super reforms became law in November 2016, the assumption was made by the Federal Government that it would only affect a small number of super fund members.

Specifically, the government has introduced what is called a transfer balance cap of $1.6 million, which is designed to limit the total amount of superannuation savings that can be transferred from accumulation phase into ’a tax-free retirement (pension) account’.

The government’s claim is that very few Australians will be affected by this proposal because the average superannuation balance for a 60-year-old Australian nearing retirement is $285,000. It is also said that those who will be affected by the new transfer balance cap amount to less than one per cent of fund members. This claim, however, does not seem take into account the significant number of people affected by this cap, perhaps not in the immediate future but in decades to come.

What these reforms have done is created a complicated system of retirement even for those with nothing close to the $1.6 million in super balances. Both current retirees, and individuals yet to enter their retirement phase, now must firstly understand what a transfer cap is. Think of $1.6 million from 1 July 2017. This the total amount of superannuation that an individual can transfer into retirement phase accounts.

If you have more than $1.6 million of super in super you would have had to take action well before 1 July 2017. This is because if you exceed your cap of $1.6 million in your retirement account past 1 July 2017, the ATO will direct you to commute the excess, including relevant earnings, back to accumulation and you will be liable for ‘excess transfer balance tax’.

Those who don’t have the $1.6 million in super balance yet, but are close to it, will still need to monitor their transfer balance cap closely to ensure you are abiding by the new rules. You also need to have a good understanding of your transfer balance account for additional contributions coming into the pension phase.

From 1 July 2017, if you are currently hold a Transition to Retirement Pension (TRIP) account, these accounts will no longer provide a tax exemption of those earnings on the TRIP account like they did in the past. The TRIP assets will move back into accumulation and pay 15 cents in the dollar tax on earnings. In addition to this, the TRIP account does not count towards the $1.6 million transfer balance cap.

So you need to be astute and have your adviser cross-check all your pensions, decide which can and will form part of the cap and which won’t, and revert the excess into accumulation and be prepared to pay 15 per cent tax on the earnings of the accumulation account.

Or alternatively you may decide to withdraw the excess from superannuation and invest it outside of super. This strategy will lead to all earnings being assessed at your individual marginal tax rate (if no other alternative is arranged).

Just remember though, once it is withdrawn from super, you are more limited than ever in your ability to recontribute back into super (if at all). It may be an irreversible decision. 

The information provided is general advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of a qualified advisor before you make any decision regarding any products mentioned. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly Northern Tax & Financial Services Pty Ltd employees or agents shall not be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information.