What are the implications when super exceeded $1.7M?

Except pensions paid by Super are tax-free, up to the cap (BTW, Super is not an investment class, it is an entity/holder of investments).

As Paul posted:

If a couple rolled $1.6M each (the current cap) into pension phase some years ago and those balances have now increased to $2M each, then, if they are aged 65 to 74 (i.e. their pension rate is 5%), the mandatory minimum pension is $200,000 for that couple and it is all tax-free.

Well, that is my understanding and most people I know don't realise this.

Gotta love Super .

 

It makes me question whether I should seek advice how to structure this say in 5 years or even thinking about it now, when commuting to TBC so going into pension phase from accumulation?
I just analysed and last year our SMSF RE investments returned around 13.72% (7.27% CG and 6% CF, rent growth) yet the actual rent return would be less than say mandatory 4% withdrawal.
Hence this is what I am struggling with, do we chose more CG for now since still in accumulation or should we slowly transition part to CF, unsure about the timing where is it more beneficial in accumulation or pension phase?
I think too many variables exist where I am baffling with what investment classes to be invested into where the investments in SMSF should be especially when exceeding the cap?
Is it compulsory to ever start a pension phase from SMSF? Especially if someone can have income sources from other entities? I never thought about this?

 

Definitely worth seeking advice ahead of time to make sure you are prepared on commencing pensions, you're not any better off by waiting until you are already in the thick of it.

 

The transfer balance cap was set at $1.6M on 1 July 2017

The cap is to be increased to $1.7M on 1 July 2021

The ASX has achieved an average of between 8% and 9% pa capital growth over the last 108+ years. I will use 8.5% pa below.

If two people equaled/exceeded the $1.6M cap four years ago and one person (say A) transferred their $1.6M to pension phase but the other (say B) waited until 1 July 2021 to transfer, then:

1. A’s pension payments for FY22 is based on the transfer balance having increased from $1.6M to $2.22M (assuming 4 years compound growth of 8.5%pa)
2. B’s pension payments for FY22 is based on the new cap of $1.7M

Using a rate of say 5% for both, A’s minimum pension would be $110,870 tax-free and B’s would be $85,000 tax-free.

That is, A is nearly $26,000 better off than B or $500 tax-free per week.

Does this mean that if one exceeds the cap, one should go to pension phase sooner rather than later, from a pension payment perspective?

Am I missing something?

 

But wouldn't you need to subtract 5% from point 1. above each year, as you must make the withdrawal, so compounding at 8.5% would then yield a lower amount, not $2.22M, yes or no?
But what if the investments are held in Residential RE instead? And say within that four years assuming 8.5% CG if we use the rule 72, then it would take 8.5 years to double so increasing by 100% so assuming 4.2 years it would grow by let's assume 50% for simplicity, so the $1.6 or $1.7M now would be worth $3.2M or $3.4M wouldn't this be a better outcome? The issue then becomes having enough cash for withdrawal rate based on value of investment each year, but if had cash in offsets instead could draw down from there? Eventually could sell one and reinvest into EFTs/stocks/etc?
To further confuse could one use excess cash for withdrawal amount from investments that exceeded initial $1.7M TBC, these would be taxed at 15%?
In your example above you assume both have just max TBC but what if both exceeded these max TBC?
Am I missing something?

 

Only if you have reached the preservation age？

 

That is a very common falacy. You may be able to commence a pension form super years ahead of reaching preservation age allowing release of super and replacing also contributiong annual maximum amounts for tax effective outcomes. Preservation merely limits release of funds. If you meet a condition of release there is no obstacle to super strategy and access.

eg The COVID 2 x $10K release had no age conditions. It had other conditions of course.

 

Yes. You are confusing the start amount of a pension account (the transfer balance cap) with the total funds available to invest and the actual investment assets. The pension start amount sets the % of total funds that can be exempt from tax. In the fund. The goal is to maximise the TBC amount since this stops tax on that portion of fund income. BUT if that cant be done big deal. You max it. But then the tax may be as low as 10%-15% on the excess. Or less.Not more.

 

No.

In my post, I was only using capital growth of 8.5%pa. Shares also produce income/dividends of 4% to 5% pa.

Adding back dividend imputation, the yield is even higher. It is these funds that one would use for the 5% pension payments.

So, after 4 years of 8.5% growth, I believe the fund balance would be $2.22M as I posted.

I am not a big fan of holding RE in Super as the investments are too lumpy (can't sell one bedroom if one needs the cash) but that is me.

I think you might have confused yourself.

If one starts with an investment of $1.6M, after 4 years of 8.5% growth, the investment is now $2.22M (roughly 50%).

After 8.5 years of 8.5% growth, the investment is now $3.2M (100% growth).

The growth outcome is the same for property and shares if the growth rate is the same.

That is another reason why I prefer shares in Super.
Where does one find property that produces 8.5% growth pa AND 5% income after all expenses. Property doesn't have (dividend) imputation.

My philosophy is probably different to yours. I would never use leverage inside Super and hence, no opportunity for Offsets, especially in pension phase.

My approach (at the moment) is keep a minimum of around one year's pension in cash investments and use dividends to replenish that cash balance every year. This way I am getting 8% to 9% growth pa, 4% to 5% dividend pa plus dividend imputation on my maximum amount of dollars.

So, we are talking around 13% pa total return. Cash is never going to achieve this, even in Offsets.

This is my understanding;- when one switches to pension phase and one exceeds the cap, one does not assign individual investments to be in a pool below the cap or in a pool above the cap. It is done purely on percentages.

Let's me provide an example. The current cap is $1.6M. If one has a Super balance of $2.4M, and rolls over to pension phase then $1.6M or 66.6% is below the cap and $0.8M or 33.3% is above the cap.

Over time, the fund will go up (hopefully) and the dollar amounts under the cap and above the cap will increase but the percentages stay the same.

If one needs to make a lump sum withdrawal (above the mandatory pension percentages), I understand one can specify the funds to come from above the cap (and why wouldn't you), but I don't know the mechanics of how it is done.

I believe the dollar amount and the percentage above the cap is reduced when one does this; the dollar amount below the cap doesn't change but the percentage increases. Hence, the reason for doing it this way.

Not advice as I am far from an expert on these matters.

 

Thank you for that and I realize I am only brainstorming and yes I assumed 100% growth instead of 50% my mistake.
So in your opinion, is there an age you think that's optimum when to commence pension even if the age criteria is met?
I am just trying to see how the mandatory pension percentage will be drawn if liquidity is an issue. Say RE investments produces 3% net rent yet 4% is required draw down, then is it correct to assume that than 1% shortfall can be taken from the excess part or not? I assumed I could take that from cash which sits in offsets instead of selling anything?
Other option would be to sell one IP so to have the cash, can keep a year or two in cash as required and reinvest rest into stocks?
I think I need to to have some scenarios and need to seek SMSF tax specialist who understands RE and not just stock investments, just to see what should be done?
So if government did change the rules and no longer dividends would come in would you still do what you do?

 

Thats quite unlikely. This assumes continued compounding at a very high growth rate. This ignores risks of decline and then recovery. Eg GFC took 11 years. The shortest duration major collapse of prices in recent memory was the start of COVID (March - Sep 2020). Using ASIC data for the past 10 years as a guide there isnt a mention of 8.5% compounded growth but they also mentions losses. Choose your investments - Moneysmart.gov.au
They also mention risk profile. Low return investmnet classes limit risks of loss where higher growth also comes with a higher expectancy of losses at some time.

If someone has a TSB (total super balance) that exceeds $1.6/$1.7m they cant use asset segregation methods. Segregation allows high income performance to be allocated to the penion rather than the accumulation balance to bypass the high cap rule. Instead you must use a share of total income for any high earnings and low earnings.

Also in each year at least 4% or more of the prior year value of the pension account must be drawn (ie 47% of the earnings are lost to pension withdrawals) so annual account growth is less.

Further in our experiece with client super it is unusual from retirees to only drawn pension minimums.

Real estate is even harder to achieve high growth rates. Annual valuations are not normal but even if they were a one-off etc change in value may occur but growth rates are not common at 8.5% compounded over several years. Even ASIC says maybe 6.5% (less 4% pension being drawn = net 2.5%)

There are zero plans to "do a shorten" and stop imputation credit flow through. It killed his career and nobody else will repeat that in a hurry.

 

Noted @Paul@PFI and thank you.
I think next year I will need to see you to brainstorm the direction, however I will need to bring the spouse in too! Do you provide such advice?
I would just like someone to look at our scenario and see if it was yours and what would you do in such a case? Having options is great but also can be quite confusing how to go about it in best possible ways?
I thought so too that Super is designed to draw more and more out especially when one ages hence the funds would need to come down unless someone constantly beats the mandatory pension % drawdowns?

 

Would it generally not be best to commence a pension sooner rather than later? The only time I would have thought that delaying would be better would be if you knew indexation was happening in a really short time frame, e.g. if you met a condition of release in June but the indexation was scheduled for the following July it could be worth waiting.

 

Never thought about this Super pension commencing sooner especially when one can still have income outside?
I still have another few years till release condition based on age so I think we need to wait till then?

 

I think that's why personal advice is so important, because you need to weigh up the downsides of being forced to draw an income if it's not needed compared to the upsides of an improved tax position for the fund, and consider the composition of the fund's assets to work out the best course of action.

 

Not according to this link where they state that, since 1900 (120 years), the Australian sharemarket has returned an average of 13.2% per annum.

Historical-returns-of-Australian-Stock-Market-infographic-2019.pdf (topforeignstocks.com)

This is total returns. If one assumes dividends of 4% to 5%, then average growth must be 8.2% to 9.2%. Using a growth figure of 8.5% is below half way in this growth range.

No it doesn't. The above average covers WW1, the Great Depression, WW2, GFC,... and the recovery following. Yes, it doesn't cover COVID but that crash was so short anyway.

I don't believe so. The average annual growth on my own personal share portfolio (that is, ignoring dividends/income) is:

This calendar year 7.77%
Last 6 months 10.26%
This financial year 25.68%
Last 12 months 38.90%
Last 2 years 14.49%
Last 4 years 8.71%
Last 6 years 9.46%
Last 8 years 10.90%
Last 10 years 10.96%
Last 18 years 10.94%​

... and I consider myself a mug B+H investor.

If I can obtain average capital growth of 11% pa over the last 18 years (this period includes the GFC and COVID) and the ASX has produced average growth be 8% to 9% pa over 120 years, then I don't believe that growth of 8.5% pa is very high growth rate at all.

IMHO history shows otherwise.

 

Thanks for clarifying/confirming that.

I am not getting this - can you explain it in another/simpler way?

Never taken more than the minimum except whenScoMo halved the rate due to COVID but we had already taken out our 4% prior to the announcement.

Agree.

Love it.

 

Is this only on the context of an SMSF?

If I'm in a super fund, can't I'd hold equities in the pension and bonds in the accumulation account? If there is a downturn, convert some bonds to equities to rebalance and offset the selling of equities due to the forced selling to fund the pension.

 

Well it might be unlikely if your negative, you need to be positive to get positive returns Tt is not that hard to get above average returns and just as likely to exceed 8% growth, I understand withdrawl is calculated at starting balance so by years end you may only need to withdraw 3.5% with growing dividends you might hardly notice impact of withdrawl. Decline means opportunity and higher yeilds. I had a portfolio rise 40% from march to september. My superfund gained 18.1 % to june 20 and the same again by september. The market index is not a superfund .

 

My wife and I are both 36 and I've been trying to explain to her about how super works and the tax advantages. But then I realised after reading this thread that I actually have know idea. Can anyone recommend a professional in Brisbane that can break this down simply for us? Cheers.