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How will the transfer balance cap impact retirement plans?

Accurium  |  16 May 2017Text size  Decrease  Increase  |  
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There are a multitude of short and long-term factors to consider for those retirees affected by $1.6-million transfer balance cap.


The latest updates to Accurium's retirement healthcheck allow you to assess the impact on retirement plans for those affected by the $1.6-million transfer balance cap.

Retirees with pension balances in excess of $1.6 million on 1 July have two options:

1) Commute the excess amount to an accumulation interest, keeping the money in superannuation, or

2) Withdraw the excess amount from superannuation and invest it outside superannuation.

So, which option should retirees use? This is quite complicated to assess. There are a multitude of short and long-term factors that may impact this decision.

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Why is this decision complicated?

An advantage often discussed is the amounts are retained in superannuation with earnings taxed at the concessional rate of 15 per cent (with many SMSFs actually achieving an effective tax rate of less than this), for example due to capital gains tax concessions and dividend imputation credits.

In comparison, earnings on assets invested outside superannuation will be taxed at marginal tax rates. However, what many retirees don't often realise is that due to tax concessions, like the Seniors and Pensioners Tax Offset, a household can have quite significant assets outside of superannuation before they start paying any tax in retirement.

Assets in accumulation within superannuation are treated as deemed assets under the Income Test, and assessable assets under the Assets Test for Centrelink purposes. This is the same treatment as financial investments outside of superannuation. Centrelink treatment may differ if assets outside superannuation are invested in other types of investments such as real property.

Once money is withdrawn from superannuation the decision may be irrevocable with non-concessional contributions no longer allowed for those with total superannuation balances of $1.6 million.

Thinking longer term, the sustainability of a household's retirement plans in light of the decision to hold money inside or outside superannuation will also be affected by the investment mix of assets inside versus outside superannuation, future levels of spending from each environment, and how long each person might live.

Accurium's retirement healthcheck takes into account all of these factors when assessing retirement plans and can be used to:

• Examine which environment is likely to provide the best retirement outcome.

• Make decisions on where to draw spending from to minimise tax.

What is the impact on retirement plans?

What we find is that for many households affected by the $1.6-million transfer balance cap, the decision of whether to hold excess pension assets inside or outside superannuation often has less impact on their overall retirement plans than you might think.

When we assume a household invests in a similar asset mix inside and outside superannuation, the key differences in outcomes are driven by tax, and for all but the very wealthiest of households, a similar retirement sustainability score can be achieved whether assets are invested in accumulation or outside superannuation.

This is largely due to the generous tax concessions available to pensioners outside superannuation and will be great news to retirees.

The conclusion here is that the decision around where to hold assets in excess of $1.6 million is only one of many important decisions that retirees' need to make with their adviser when setting retirement plans.

Accurium's retirement healthcheck is designed to take all these factors into account and help retirees set sustainable retirement goals.

Case study: Dealing with an excess transfer balance at 1 July 2017

Anne and Simon Fisher are retirees aged 61 and 66 respectively with:

• $4 million in total savings,

• $2.5 million in account-based pensions ($2 million for Simon and $500,000 for Anne),

• $1.5 million invested outside superannuation, and

• Savings invested in a 50 per cent growth, 50 per cent defensive asset mix.

Anne and Simon want 80 per cent confidence that their retirement plans are sustainable. Before the introduction of the transfer balance cap they used the retirement healthcheck to set the following retirement spending plan that met this requirement:

• Annual spend of $144,000,

• $50,000 expense in three years' time,

• 20 per cent reduction in spending on first death.

We analyse the two options for Simon using the retirement healthcheck:

Option 1: Keep the excess $400,000 in accumulation in superannuation

If Simon's excess of $400,000 is commuted to accumulation phase, then the confidence their retirement plans will be sustainable drops from 80 per cent to 79 per cent. Anne and Simon will need to reduce their annual spending by $2,000 to maintain 80 per cent confidence.

While any reduction in living standard will be felt by retirees, many would have been expecting a bigger impact than this 1 per cent reduction.

The chart below illustrates how their retirement spending needs might be funded based on fixed-return assumptions. This shows it may be most tax effective for Anne and Simon to draw their spending first from the savings in accumulation phase as the effective taxation on earnings is higher than that being paid outside of superannuation.


How your retirement spending is funded


Source: Accurium


Option 2: Withdraw the excess $400,000 and invest it outside superannuation

If Simon's excess of $400,000 is withdrawn and invested outside superannuation then the confidence that their retirement will be sustainable drops from 80 per cent to 77 per cent.

This is a slightly worse outcome than leaving the excess in accumulation, due to the fact the couple's total non-superannuation assets increase to $1.9 million. This in return results in a higher effective tax rate paid on income outside superannuation.

To maintain an 80 per cent confidence level they would need to reduce their annual spending by $3,000 to $141,000.

Again, the superannuation reforms may mean Anne and Simon need to reduce their standard of living in retirement or accept a greater risk of outliving their savings.

However, to maintain 80 per cent confidence that their retirement plans are sustainable, they would only need to reduce their annual spending by around 2 per cent.


All retirees will need to review their retirement plans in light of the upcoming superannuation reforms.

For those potentially affected by the changes there is little time remaining to assess and employ strategic decisions to avoid breaching the transfer balance cap. Plans need to be reviewed and changes need to be made by 1 July 2017.

The retirement healthcheck's goals-based approach can give retirees confidence in any changes they need to make to keep their retirement plans on track.

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