Superannuation fund investors, especially those retired or about to retire, will be hoping the Treasurer delivers on this week's promise to present the super change legislation in parliament by the end of 2016. Although there's still no certainty about passage of the legislation by the Senate, fund members will at last be able to start changing their strategies and investments to comply with the new rules commencing on July 1 2017.
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Despite the government's original claim that only a relatively small percentage of retirees would be affected by the $1.6 million cap on fund pension accounts, well over 1 million retirees including many defined benefit fund members may be forced to change their strategies. While the proposed changes won't affect people with small amounts in super, for those affected there are substantial penalties for not complying with the new provisions.
The main difficulty is to determine what the precise super account balance will be on June 30 2017. The legislation will require pension fund balances in excess of $1.6 million at that date to be shifted into a separate accumulation fund account.
For self-managed super funds, creating a separate account won't be difficult except for accurately assessing the value of fund assets on July 1 2017. For industry and commercial pension funds the tasks involved include opening a separate superannuation fund and determining how much to move to the new account.
In many cases, this will involve liquidating investments in the pension account and moving the cash so received into the new account. One way to facilitate this process is to ensure the cash component of the pension fund is built up prior to the end of this financial year.
SMSFs won't be under the same pressure to cash up investments that may need to be switched to an accumulation account to comply with the new rules. The legislation is yet to clarify the extent of the capital gains tax relief to be provided to pension fund investor but there's an incentive for pension funds to realise tax-free capital gains before July 1 2017.
The major complication for defined benefit fund members is knowing what value the legislation places on their pension. This presents a problem only when there's also a separate personal pension plan. These retirees will be forced to move part of their private pension fund to an accumulation account if the combined assessed value of their defined benefit pension plus private pension fund exceeds $1.6 million.
Hopefully the legislation due by the end of this year will clarify how many people have to readjust their private pension fund investments. The sooner the impact of the changes is known, the easier it will be for retirees to make the necessary changes.
Daryl Dixon is the executive chairman of Dixon Advisory. comments@dixon.com.au
