The introduction of the $1.6 million transfer balance cap will in some cases require advisers to rethink the strategy of maximising their clients’ retirement assets in superannuation. I am discovering, as a result of an ageing client population, that some clients should be advised to reduce their superannuation to avoid the possibility of me being sued.
Clients affected by the $1.6 million pension limit will have the option of withdrawing the excess and investing it personally, or partially commuting the pension and rolling it back into accumulation phase.
For clients with high taxable income outside of superannuation, the decision to roll it into an accumulation account will be easy. Paying tax on the income earned in an accumulation account at 15 per cent, compared with paying income tax at even the lowest marginal personal tax rate of 21 per cent, including the Medicare levy, is clearly a better option.
Where clients with an excess have little or no assessable income, the opposite option is often favourable. Given, that after applying the low income and the seniors tax offsets a couple can earn about $56,000 and pay no tax, it can make sense to take the excess over the $1.6 million limit and invest it personally.
High income, low growth
Planners will, however, be faced with the task of selecting high income earning investments with low growth in personal names, while retaining high growth assets in the superannuation pension account.
If high growth assets are invested outside of superannuation, which must be sold, this could result in higher tax being paid than if the amount had been retained in a superannuation accumulation account.
Where growth assets held in personal names can be sold in a structured way, so that the capital gain can be restricted to result in total income of less than $37,000, they would, in effect, not pay any more tax due to the 50 per cent general CGT discount, compared with the one-third discount available to SMSFs.
Those of my clients not faced with the dilemma of possibly having to withdraw superannuation because of the pension transfer limit still need to be made aware that in some circumstances superannuation should be paid out and not retained when one of them dies.
When superannuation balances are made up entirely of tax-free super, the risk to advisers of not having this discussion with clients is not that great.
When superannuation balances are made up of taxable super, and clients are not advised about the tax implications of non-dependents receiving superannuation, advisers could find themselves in the firing line from disgruntled beneficiaries who are paying tax on superannuation proceeds.
Death brings decisions
When conducting an annual review with clients, especially those that are in their 70s and older, I advise that we will need to make some decisions upon the first of the couple dying. On the basis of estimated taxable superannuation balance that could be remaining upon the death of the last member an estimate of the tax payable by their non-dependent beneficiaries is provided. After agreeing with them that they would rather make their children richer than the ATO, I outline the process that will need to be undertaken when the first of them dies.
This involves assessing the total value of superannuation, calculating the value of investments needed in the superannuation to fund the lifestyle of the survivor based on an optimistic life expectancy, working out how much needs to be retained, and also how much should be taken as a tax free lump sum.
The options a client has after taking the lump sum will be the subject of my next article.
