SuperConcepts executive manager of SMSF technical and private wealth Graeme Colley told SMSF Adviser there is a reasonable number of people who have previously worked in positions such as ambulance officers or teachers and are confused about how these defined benefit pensions will be impacted by the caps.
“It may only be a small amount but it does impact upon the balance caps. So those people that have been in those types of funds need to be aware that will be taken into account in relation to the valuation of the $1.6 million cap,” said Mr Colley.
“Many of them do understand that but I think it’s a little bit of a sleeper for some people, who may have been a public servant for a short time many years ago and have still got some benefits in a public sector superannuation fund or maybe one of the big corporate funds.”
Those SMSF trustees need to understand the way in which those pensions are valued under the new rules is different from account-based pensions, he said.
PwC director of private clients Liz Westover has also seen a lot of confusion around defined benefit income streams and how they are dealt with under the transfer balance cap or the pension caps.
Ms Westover said understanding how defined benefit pensions interact with other sorts of funds is particularly difficult.
“For example, we’ve got clients who have defined benefit funds and SMSFs, and constitutionally protected funds,” she said.
Some clients might have a combination of two or three of those particular types of funds and may be receiving income streams from all of them, she said, so determining how they all interact together to come up with the right outcome in compliance with the law for these clients can be a complex process.
“A lot of them are easy to deal with in isolation, but when you’re trying to combine a number of them, it means actually crunching through the numbers and getting clients to understand it,” she said.
Unless I have misunderstood the Explanatory Memorandum, it seems to me that defined benefit pensions will only be taxed on any amount in excess of $100k pa ?
Not quite. It depends on what other pensions are active. If the only pension one has is 100k defined benefit then Allen is correct, because 16 x 100k = 1.6m, equivalent to the transfer balance cap. PS “lifers” drawing a DB pension would typically be in this category. Others may have had other employers or have been self employed or even have made other super contributions. If their DB pension exceeds100k p.a. then they can not have any zero-tax pension from another source. It is particularly egregious for some state government pensioners, where DB pensions are often intended to be tax free because they were taxed during accumulation phase unlike CSS public servants, where tax is largely deferred until pension phase.
Thanks Miranda. How, in fact, are the value of defined benefit pensions assessed under the new rules?
CSS defined benefit pensions are already taxed at marginal rates (less a 10% tax offset) in pension phase. 16 times the CSS pension will be subtracted from the $1.6m tax-free transfer cap, so a modest pension of $20k will reduce the cap by $320k. Such a pensioner with more than $1.28m in pension phase in (say) an SMSF will lose $320k of the tax-free zone others enjoy, while continuing to pay tax on their CSS pension. This is a form of double taxation. The 15% tax above $1.28m will more than offset the CSS pension’s 10% tax offset.