Balance Booster - retirement bonus vs Re-Contribution strategy

Can someone please clarify the situation with the Balance Booster?

From what I read, it is money set aside by a super fund for the moment when you transfer funds from accummulation account into the pension one. Usually funds have also the clawback statement to prevent you from withdrawing too much (see below an example from Australian Super PDS):

What is a clawback and when will that happen

Once you’ve moved to Choice Income, if you withdraw 50% (or more) of your starting account balance within the first financial year there’ll be a clawback of the entire Balance Booster. The 50% withdrawal threshold could be made up of any combination of income payments, additional withdrawals and rollovers out to another AustralianSuper super account or to another superannuation fund.

On another side the re-contribution strategy suggests to withdraw and re-contribute as much as possible to reduce the taxable component and move funds into non-taxable one - in case if any super is left to your children - that would reduce that tax amount that they are going to pay on the inheritance. (I'm considering 60 yo. person, who fully retired and is eligible to use his super)

My understanding is that accummulation account is "heavily taxed" (15% on any earnings and 10-15% on the capital gains when investments are sold), while the pension account is completely tax free. So if one was to withdraw funds from the accummulation account as a lump sum, then the person would be facing large CGT so it is not very efficient and probably one would be better to transfer it into the pension account and withdraw from there as a lump sum. But that might impact the Balance Booster. Not sure in what way - are they going to take some money out of your funds?

Can anyone provide an idea what Booster amount we are talking about for the super balances around 600K gathered over 15 years in shares products? Would it be a few thousands that can be disregarded? or we are talking 10% of the overall balance that is quite noticable. I remember once I tried to move my existing investments in the super fund from one product to another and move of 50K resulted in 3.5K capital gain that I saw in the statement after this transfer. If this is applied to 600K balance then we are talking around 50K that one probably wouldn't want to loose.

Any clarification will be appreciated.

 

This is a specific fund name I suspect. (Australian Super?) Some funds offer a "bonus" under various names when a accumulation account changes to pension. It depends on how the fund prices the investmnets units held by each member and their strategy choices. Some funds dont pay it because they price the units differently and adjust it to a tax exept value. So the asset value rises anyway.

An accumulation account is NOT taxed when the assets become pension assets. There is no CGT event as assets arent cashing and sold and cash moved. Instead a fund will generally take the existing investmnets allocated to the member account and move those to the pension fund account etc. This WIPES past accrued gains...So you may see the notional member balance at say $600K on 28th feb and on 29th feb see a pension account balance of $612,000 as an example. The assets supporting the pension become untaxable assets. DONT EVER CHANGE asset allocations until after the pension commences. In a SMSF this type of change is proportioned over a year but in a public fund it isnt. The bonus is a bit of furphy as all it is is a notional value of the accrued tax that may have applied if you cashed up on the day the pension started. This occurs because the "value" of your investments has an lesser adjustment for the accrued tax. I have copied a explanation from ART below. To say its a bonus isnt quite true. It a adjustment to ignore tax that could have been payable. If you convert from say shares to a cash only strategy in the accumulation account before starting a pension the bonus value would be $0.

The answer you are seeking on your specific bonus is something your fund can tell you.

ART describe the bonus this way....

Information about your potential Retirement Bonus calculation​

You may be able to receive a Retirement Bonus when starting a new Retirement Income account, restarting an existing Retirement Income account with additional new money, or buying a Lifetime Pension. This applies even if you’ve previously opened a Retirement Income account and received a Retirement Bonus. The estimate shown assumes that you transfer the entire balance of your Super Savings Accumulation account(s) and/or Transition to Retirement (TTR) Income accounts (if applicable) to a Retirement Income account and/or Lifetime Pension (excluding Corporate Lifetime Pensions which are not eligible).

The Retirement Bonus is calculated as 0.50% of the eligible amount you've transferred from your Accumulation account or Transition to Retirement Income account with us, to a Retirement Income account and/or Lifetime Pension. There’s no limit on the number of times you can receive a bonus. However, there’s a lifetime cap of $9,500 on the total bonus amount you can receive. This is based on 0.50% of the general transfer balance cap, which is currently $1.9 million.

The Retirement Bonus isn’t calculated on any Defined Benefit money you may have. However, if your Defined Benefit is first transferred to an Accumulation account (or Transition to Retirement Income account), the money then transferred into a Retirement Income account or Lifetime Pension would be eligible for the Retirement Bonus.

The amount you actually receive will depend on how much money you transfer to a Retirement Income account and/or Lifetime Pension. Any money you've previously used to start a Retirement Income account and/or Lifetime Pension will not get a Retirement Bonus, and this is reflected in your Retirement Bonus estimate. Further details on eligibility criteria and how the Retirement Bonus is calculated can be found on our website.

The Retirement Bonus is funded from a reduction in tax payable by Australian Retirement Trust that can occur when a member starts a Retirement Income account or Lifetime Pension. All payments are made at the discretion of the Board. If there is a material change to the fund’s tax position (due to a significant market event for example), we may need to stop, alter and/or change the terms and conditions of the Retirement Bonus.

*To be eligible to open these products, you must first meet eligibility criteria.​

 

That explains it: "There is no CGT event as assets arent cashing and sold and cash moved. Instead a fund will generally take the existing investmnets allocated to the member account and move those to the pension fund account etc. This WIPES past accrued gains...". It means the gain tax would be paid if you sell it all out.

So if the lump sump withdrawal is done in the accumulation phase then capital gain has to be paid - so better to do it from the pension account.

 

When you convert to a pension phase, a fund has two main choices for the wiped provisioned capital gains tax

1) Distribute it across all members
2) Give it to the member commencing a pension

or some combination of the two

if your fund doesn’t offer a balance booster it means you have benefited from other members pension commencement throughout accumulation.

 

Thanks - it does.

 

Oops...

Ahh well, now I know for next time

 

Depending on the fund it might not have mattered.

Some funds do bonuses based on investment option, some it is fixed regardless, some have a different unit price between phases, and some don't do anything at all but then calculate end of year adjustments as opposed to crediting rates.

 

Always worth getting personal advice as depending on the DSFA rule it could be a deemed segregated period and fund could be 100% exempt income after conversion to retirement phase.

 

Here is a diagram explaining how a pooled superannuation fund calculates the equitable balance between members in the transition to tax free pension phase.

 

They updated it. Used to be black and white.

 

SIS Regs on allocations would have some major issues at the APRA level if all members bore taxes based on OTHER members. Back years ago it varied but modern funds use unitised pricing that changes weekly (Wednesdays for some unknown consistency based reason). I think it goes back to the listed trusts days and unitchanges were manually processed on one day of the week. SIS Regs refer to fair and reasonable for all members.

Unitising is pretty easy. Wedensday next week there is a entry price based on true buy pricing. Therefter as it rises/falls in later weeks a unrealised gain / loss is either added/deducted based on a assumed 15% rate and aftre a year its 10%. This adjustmnet occurs to each mmeber as it is unique to each holding acquired. . Sales of units is based on exctual exist (assuming a consistent margin spread too) for manager fees. Each members tax portion is allocated realised and unrealised (and positive and negative) and offsets on annual basis. At year end all members individual positions all accumulates and closely matches (or should!!) total relaised taxable gains.etc. Its a earnings ajustmnet amount unlike say constributions and tax on contributiosn which are member allocated.

DB funds may calculate on a pooled basis since members themselves dont bear tax other than if they make contributions. They get their entitlemnets anyway whether the fund makes or loses investmnet earnings.

This basis is why a trust model is used. The super trust reflects all members but each member gets their allocated share. Doing otherwise breaches trust obligations. If a fund doesnt offer an adjustmnet it just reflects a different basis of how assets are allocated. eg the tax reserving may be excluded from unit values and then adjusted as a net adjusted value. Its why I said its a furphy. They arent giving you something you werent otherwise entitled to. The value in the member account wont be more or less except if earning reserves are held. SIS Regs ensure they are allocated in a fair & reasonable manner across all members. The ones who can lose are longer term members who join when reserves are low and depart the fund when its high (up to 10% average annual income max). I was involved in a complex resolution where that was detected and APRA wanted to ensure all deceased and departed members also got their annual share over the 5 years. As part of the resolution APRA even made sure extra costs to do this were borne by the trustee not all members. As a result of that work I did a LOT of work for a super consultancy to many company and public funds on these issues. Its also why few company funds exist these days. The sophistication in unit pricing and strategy options is too complex for small funds. A typical member in a simple growth strategy will likley receive 12, 26 or 52 contributions a year and new investments (wednesdays) occur continually. So a member account can hold hundreds of individually priced positions which are invisible to members. Often rounded to 6-8 decimals.