Heffron | Pension planning for 30 June 2018

Pension planning for 30 June 2018

Winter has arrived and that means it is time to get all our pre-30 June planning finalised.

One area which is always worth addressing early is pensions – have we done everything we need to do and is there anything extra we should be thinking about for 2017/18?

In this article, we provide a few tips.

Pay the minimum

Most obviously, pay the minimum amount required before 30 June 2018.  Remember that “paid” means:

  • For cheques – the cheque is dated on or before 30 June 2018, is held by the trustee on or before 30 June 2018, is banked promptly and the balance in the SMSF’s cheque account at the time the cheque was written was sufficient to cover the payment.  While the cheque can be presented to the bank after 30 June 2018, it is important that it occurs quickly and is honoured; and
  • For electronic transfers – almost always means that the money actually appears in the individual’s bank account on or before 30 June 2018.  Given that 30 June 2018 is a Saturday,  it’s not enough to process an on line transfer at 11pm on 30 June 2018 and hope for the best - you’ll need to get in earlier than that!

2017/18 is the first year where only “superannuation income stream benefits” (pension payments) count towards the minimum.  Unlike previous years, partial commutations no longer count.  This also means that all payments counting towards the minimum must be paid in cash rather than by transferring assets (often referred to as in specie payments) since only lump sums such as commutations can be paid in specie.

But don’t pay too much as a pension payment

In the new world of limited pensions (thanks to the $1.6m Transfer Balance Cap) getting money into retirement phase pensions has never been harder.  That makes it more important than ever to ensure that those with these pensions who take more than the minimum pension consider other options as well:

  • Should the “extra” amount be drawn from the member’s accumulation account in preference to simply taking a higher pension?  The higher the pension account relative to any accumulation accounts, the more of the Fund’s investment income that will be tax exempt;
  • Was the extra amount actually a partial commutation of the pension?  (Remember this is not a decision that can be made now, it had to be made in advance of the commutation.)  If this step has not been taken for 2017/18, it is something to consider for 2018/19.  A commutation allows a member to remove the amount of the commutation from his or her Transfer Balance Account.  This might be useful in the future if the member’s spouse dies and the member inherits more pension accounts, or the member makes downsizer contributions and wants to convert them to a retirement phase pension.

Don’t forget transition to retirement income streams

Now that transition to retirement income streams no longer give the paying superannuation fund a tax exemption on its income (because they are not classified as retirement phase pensions) it’s easy to forget that they are still pensions.  It is still important to meet the minimum pension requirements for these income streams.  Admittedly one of the big downsides of failing to do so (loss of the tax exemption) is no longer in place.  But not paying the minimum pension is still:

  • A breach of superannuation law;
  • A trigger to recalculate the tax free / taxable components of the pension balance; and
  • Exposes the member to the risk that any payments which have been taken will be treated as lump sums for tax purposes which, unless the member has unpreserved money, will be early release payments and taxed at the member’s marginal tax rate (with no recognition of any tax free component, no use of the low rate threshold etc)

And remember, the ability to elect for a payment to be taxed as a lump sum instead of a pension payment (which was great for many under 60 as it reduced their personal tax bill) is no more .  The taxable part of any TRIS payment will be at the member’s marginal tax rate (less a 15% offset).

Watch out for retirement and age 65

In all the effort to prepare for 30 June 2017 and then lodge the 2016/17 annual returns (with all the complexity around CGT relief) it’s easy to miss the fact that some members will have reached 65 or retired during 2017/18.  That means their transition to retirement pensions have become retirement phase pensions which has some important consequences:

  • The $1.6m Transfer Balance Cap applies from the moment they turned 65 (regardless of their work status at the time) or from the moment they told the trustee they had retired;
  • If they need to “roll back” part of their transition to retirement phase pension to comply with this and it wasn’t done at the time, do so now for two reasons.  Firstly it will minimise the penalties to the member for exceeding their cap.  Secondly it will ensure the 2018/19 minimum pension is not based on the higher balance.

There will be more to do in 2018/19 – we’ll provide an update on that in July!