SMSFA highlights important differences with indexation
SMSF practitioners with clients receiving capped defined benefit pensions should be aware that indexation for these pensions will operate differently from normal account-based pensions, says the SMSF Association.
SMS Association head of technical Peter Hogan says unlike account-based pensions, where a member has no access to indexation once the full $1.6 million transfer balance cap is used up, the indexed amount for capped defined benefit pensions will be reset each year.
“With these cap defined benefit pensions, it doesn’t matter if the member has technically used up their entire transfer balance cap. They’re still going to get indexation on their pension,” Mr Hogan said.
The way the cap is going to be policed with capped defined benefit pensions is that there will be a $100,000 amount and any income in excess of $100,000 will be taxed differently.
“[They’ll] lose their 10 per cent rebate or if they’re an unfunded government defined benefit scheme or if you’re a funded defined benefit scheme, 50 per cent of the excess will be included in income and taxed at the marginal rate,” Mr Hogan said.
“That $100,000 is going to end up being an indexed amount and will be reset each year. As the general transfer balance cap gets indexed up, up to $1.7 million [for example,] the $1.7 million will be divided by 16 and that’ll give you a number which will be more than $100,000 which will become the new threshold for people receiving defined benefit pensions.”
Mr Hogan said only the income above that new threshold will be subject to the different tax regime.
“It’s a slightly different treatment to what people get for account-based pensions,” he said.