Simon Barwick, Managing Director and Authorised Representative, bdhSterling.
The recent Budget announcements by the Federal Government will be of particular interest to those clients who have either transferred a UK pension fund, are in the middle of a phased UK pension transfer, or are currently considering a UK pension transfer. The following is a summary of the announcements that relate to the UK pension transfers, and Non-Concessional Contributions more broadly.
Among a raft of proposed changes to superannuation was an announcement of a lifetime cap on Non-Concessional Contributions (NCC) cap of $500,000 which could significantly affect UK Pension transfers. The lifetime cap will apply to anyone up to age 74 and is applicable from the date of the budget delivery, being 7.30pm 3 May 2016. Transfers from foreign retirement savings vehicles, such as UK Pension Funds, are treated as a NCC, and will therefore be assessed against the proposed lifetime cap. The NCC assessment of a UK Pension transfer is calculated as: the transferred amount less any Applicable Fund Earnings (or fund growth) that has been chosen to be taxed in the super fund by the member, at a rate of 15%. There is, however, no change to Applicable Fund Earnings and they will continue to be treated as Concessional Contributions (CC) to superannuation and will remain exempt from the annual CC cap.
So how are existing UK Pension transfers treated?
The Government has proposed that all NCCs made since 1 July 2007 will count towards the lifetime cap. A person with NCCs already over the lifetime cap, (for example any previous UK pension transfer/s over $500,000 AUD), will be treated as if they have fully utilised the lifetime cap, will not be required to ‘reverse’ any excess amounts, and will not be able to make further NCC. For anyone who has implemented a ‘phased transfer’ of their UK pension funds, and has exceeded the proposed $500,000 lifetime cap, urgent advice is required from an adviser experienced in both UK pension transfers and Australian superannuation.
The ‘bring forward’ provisions, which allowed transfers up to $540,000 within the financial year of a client’s 65th birthday, have now been abolished. If a person has already triggered the ‘bring forward’ provisions, (i.e. by a previous NCC over a single year allowable contribution of $180,000), they will still be able to make additional NCC as long as they do not exceed the proposed $500,000 lifetime cap. The following table gives an example of this.
So what are the penalties for excess contributions?
The government has indicated that excess NCC will be subject to a penalty tax regime but has not articulated what this will actually be. It is quite possible that the current penalty tax regime will be applied where the superannuation fund member is given the option by the ATO to withdraw all excess NCC or retain them in the superannuation fund. Where the member elects to withdraw the excess NCCs the ATO will permit a tax free refund of all excess NCC, but the member is likely to be liable for personal income tax on an amount the ATO calculates to be ‘associated earnings’. Should the member elect to retain the excess NCC within their fund the fund will be subject to penalty the top marginal tax rate of 47% + 2% Medicare levy.
Who are the major beneficiaries of the proposal changes?
Under the previous superannuation legislation a person aged between 65 and under 75, was often unable to transfer their UK pension fund/s because they either:
- Didn’t meet the work test (i.e. being gainfully employed for 40 hours in a 30 day period), or
- Did meet the work test but had UK pension fund balances in excess of the formerly allowed NCC limit of $180,000pa.
Under the proposed superannuation changes they will, from 1 July 2017, be able to take advantage of the NCC lifetime cap and can contribute up to $500,000 without having to meet any ‘work test’ requirements.
Apart from the above proposals, the government has also noted the following:
- Contributions made as part of a personal injury settlement, or Capital Gains Tax (CGT) cap for eligible small business are not to be assessed against the $500,000 lifetime limit, and
- The Concessional Contributions cap (which includes employer mandated and salary sacrifice contributions) has been dropped to $25,000 per financial year. As previously mentioned, Applicable Fund Earnings on UK Pension funds are exempt from this cap.
Although the proposed changes are likely to have widespread implications for clients with UK pension transfers it is important to note that:
- These proposals are yet to be formally legislated. Furthermore, it is unclear what political party will prevail at the 2 July 2016 election, and the makeup of the senate (that will ultimately approve the proposals ),
- Considerable fine detail is yet to be announce to enable a full understanding of how the new legislation will work
- There has been no indication on how excess NCC’s will now be penalised, and
- It is unknown how excess NCCs made between the budget announcement and the date the legislation is enacted will be treated.
Going forward, it will be essential for advisers to have a full understanding of all Non-Concessional Contributions made by their clients since July 1 2007; be that sourced from ATO records, super contribution statements or declarations by clients themselves. It is also important that advisers know the level of a client’s Concessional Contributions made each year. Knowing both of these amounts will allow advisers to correctly advise clients of the most appropriate contribution strategies to superannuation and avoid any unforeseen penalties.
How can bdhSterling Assist you?
Do you have a UK pension fund and are not sure how the proposed changes apply to you? Is your pension fund valued over $500k but you’re not sure what your options are? Don’t worry, bdhSterling can assist you.
bdhSterling is licensed to provide financial advice in Australia, the UK and in a number of offshore jurisdictions. We are one of the larger employers of pension transfer specialists globally and have administration teams working around the clock to process your transfer.
The best place to start is to get in touch with our team and request a written report on your options so you can make an informed decision about your UK pension fund. Take the first step and download a UK Pension Transfer Starter Kit now.
The summary detailed above is limited to the budget proposals that relate to clients with UK pension transfers. If you have any questions regarding your pension transfer strategy, contributions made to your super fund, or the more broader implications of the Budget proposals, please speak to your adviser.
