Super Changes Webinar Capped defined benefits 9 May 2017
Welcome to Super Changes Capped defined benefits The new transfer balance cap commences on 1 July 2017 and will limit transfers into retirement phase accounts Defined benefit income is a super income stream benefit that is paid from a capped defined benefit income stream Capped defined benefit income streams cannot, of themselves, result in an excess transfer balance for an individual Modifications therefore apply to the transfer balance cap rules for capped defined benefit income streams 2 UNCLASSIFIED Super and tax professionals professionals webinar – Super Changes (capped defined benefits), 9 May 2017
Outline Today we’ll work through: What income streams are capped defined benefit income streams The modifications to the transfer balance cap for capped defined benefit income streams, in particular: How the special value of these income streams is calculated for transfer balance cap purposes What the defined benefit income cap is and the consequences of exceeding it What happens if you have a mix of capped defined benefit income streams and other income streams Some practical considerations if you are receiving capped defined benefit income streams 3 UNCLASSIFIED Super and tax professionals professionals webinar – Super Changes (capped defined benefits), 9 May 2017
Capped defined benefit income streams Regardless of when it is payable: Lifetime pension If payable just before 1 July 2017: Lifetime annuity Life expectancy pension Life expectancy annuity Market-linked pension Market-linked annuity Market-linked RSA pension 4 UNCLASSIFIED Super and tax professionals professionals webinar – Super Changes (capped defined benefits), 9 May 2017
Capped defined benefit income streams On 13 April 2017 the Government released draft regulations for comment that would expand on this list to include: lifetime pensions provided under rules which are in existence at the time the proposed regulations are made that: may be commuted in limited circumstances, or where payments are ceased or varied for a child beneficiary public sector superannuation scheme funded invalidity pensions that can be varied, suspended or ceased in certain circumstances BUT - no current plans to include Flexi pensions 5 UNCLASSIFIED Super and tax professionals professionals webinar – Super Changes (capped defined benefits), 9 May 2017
Capped defined benefit modifications A statutory formula applies to work out the value of your superannuation interest that supports a capped defined benefit income stream. This value is called the ‘ special value ’ and gives rise to a credit in a member’s transfer balance account. The law also sets out special rules to calculate the debit value when one of these income streams is commuted. A separate cap, the defined benefit income cap , affects the defined benefit income that is included in your assessable income. It also limits the tax offset available in respect of the untaxed element of certain benefits that are defined benefit income. 6 UNCLASSIFIED Super and tax professionals professionals webinar – Super Changes (capped defined benefit income), 9 May 2017
Special value of a defined benefit interest If a capped defined benefit income stream is payable to you, a credit arises in your Transfer Balance Account The credit amount is the special value of the superannuation interest Calculation of the special value depends on the type of product 7 UNCLASSIFIED Super and tax professionals professionals webinar – Super Changes (capped defined benefit income), 9 May 2017
Special value of a defined benefit interest Total super balance The “special value” of your capped defined benefit income stream for transfer balance cap purposes will generally also be used to calculate your total super balance. However, for a market linked pension , the special value will be replaced with the 30 June account balance of that capped defined benefit income stream. This essentially means that a market linked pension is treated as a capped defined benefit income stream for transfer balance cap purposes, however will be treated as an account based pension when calculating your total super balance. 8 UNCLASSIFIED Super and tax professionals professionals webinar – Super Changes (capped defined benefit income), 9 May 2017
Special value – life products Life products (lifetime pension or annuity): special value = annual entitlement x 16 ‘Annual entitlement’ is calculated by annualising the first superannuation income stream benefit you are entitled to receive This done with the following formula: First payment x 365 Days in period 9 UNCLASSIFIED Super and tax professionals professionals webinar – Super Changes (capped defined benefit income), 9 May 2017
Special value – life products Annual entitlement calculation: First superannuation income stream benefit you are entitled to receive: You must include the gross, or pre-tax, value of the first superannuation income stream benefit you are entitled to receive The first benefit you are entitled to receive includes all of its constituent components: All tax-free and taxable components (taxable components consisting of taxed and/or untaxed elements) It might include part of a benefit being paid for reasons in addition to retirement – for example, a partial invalidity loading Divided by ‘days in period’: This will be the number of days to which the benefit relates to (for example, 7 for a weekly payment benefit) 10 UNCLASSIFIED Super and tax professionals professionals webinar – Super Changes (capped defined benefit income), 9 May 2017
Example 1 – special value of lifetime pension Joanna is 65 on 1 July 2017 and has been receiving a lifetime pension since she was 62. The first superannuation income stream benefit Joanna is entitled to receive on or after 1 July 2017 is a fortnightly pension payment of $5,753.42 Her annual entitlement is worked out as follows: First payment x 365 Days in period $5,753.42 x 365 = $149,999.88 14 The special value is worked out by multiplying her annual entitlement by 16: $149,999.88 x 16 =$2,399,998.08 A credit will arise in her transfer balance account on 1 July 2017 for this amount. 11 UNCLASSIFIED Super and tax professionals professionals webinar – Super Changes (capped defined benefit income), 9 May 2017
Special value – term products Term Products (Life expectancy and Market-linked) Life expectancy or market-linked pensions or annuities: special value = annual entitlement x remaining term The ‘annual entitlement’ will correspond to the amount required to be paid during the year in accordance with the agreement under which the life expectancy or market linked pension is provided and the regulatory provisions The ‘superannuation income stream you are entitled to receive’ again comprises all of its constituent components (for example, all of its tax free component and taxable component (taxed elements and/or untaxed elements) The ‘remaining term’ is the number of years remaining in the period that benefits are payable but rounded up to the next whole number 12 UNCLASSIFIED Super and tax professionals professionals webinar – Super Changes (capped defined benefit income), 9 May 2017
Example 2 – special value of term product Just before 1 July 2017, Victoria has a market linked pension. The first benefit she is entitled to receive from her pension just after that time is her fortnightly payment of $2,301.37 due on 4 July 2017. The current account balance of the pension in $550,000. The remaining term in Victoria’s pension just before 1 July 2017 is 9.75 years. 13 UNCLASSIFIED Super and tax professionals professionals webinar – Super Changes (capped defined benefit income), 9 May 2017
Example 2 – special value of term product Victoria’s annual entitlement just before 1 July 2017 is $60,000, which is worked out as follows: First payment x 365 Days in period $2,301.37 x 365 = $60,000 14 The remaining term in Victoria’s pension just before 1 July 2017 is rounded up from 9.75 years to 10 years (being the next whole number) when determining the pension’s special value. The special value of Victoria’s pension just before 1 July 2017 is $600,000 ($60,000 x 10 years). A credit arises in her transfer balance account on 1 July 2017 for this amount. Note that when calculating Victoria’s total super balance, Victoria’s pension will be valued as $550,000. 14 UNCLASSIFIED Super and tax professionals professionals webinar – Super Changes (capped defined benefit income), 9 May 2017
Existing income streams at 1July Special Note: If you are currently receiving a capped defined benefit income stream, the credit that arises in your transfer balance cap will occur on 1 July 2017 This value will be calculated by your fund based on the first superannuation income stream benefit you are entitled to receive on or after 1 July 2017 15 UNCLASSIFIED Super and tax professionals professionals webinar – Super Changes (capped defined benefit income), 9 May 2017
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