Will your PSS benefit be affected by the super changes?
Many public servants have asked us whether the changes announced in the 2016 Federal Budget will affect their PSS benefit. The answer is almost always ‘it depends’. We’ve noted some of the changes below and our thoughts on what it all means.
What are the changes?
There is now a $1.6million cap on the amount of superannuation that can be transferred into a tax-free pension. Certain defined benefit income streams will be counted in the cap. These include those that can be taken as part of a retirement benefit from the PSS.
To convert these pensions to a lump sum equivalent, a factor of 16 will be used. This means that if your defined benefit pension pays you more than $100,000 pa you will have used this cap in full. Excess amounts above the cap must be rolled back into super. As you may know, with defined benefit funds, this roll back is not possible. So if you have an income, which has been solely sourced from a defined benefit pension, it will generally not be deemed in excess of the pension cap (even if the amount is over $100,000 pa). There are lots of exceptions, so again, please seek advice to determine if your benefits will be effected.
No penalty is good news, but what about the tax?
Andrew Boulds from Milestone Financial says “defined benefit income streams will not result in a breach or penalty tax. This is good news. However, the income tax treatment of the pension will be modified. This means the result is similar to rolling the excess back into an accumulation super fund”.
This is where it gets complicated. At the moment, depending on your age, part of your benefit will be tax-free and part will be taxable. Assuming you are over 60, you may also receive a tax offset on the tax you pay. From 1 July 2017, the same rules will apply if your benefit is less than the cap. However, if your benefit exceeds the cap, additional tax will apply.
Beware of making additional contributions to other funds
Many Public Servants currently take advantage of the opportunity to make additional, concessional contributions into funds other than the PSS. This allows them to have the option in retirement for a lifetime pension from the PSS and a more flexible, but not guaranteed, pension from a non-PSS fund.
However, from 1 July 2017, some contributions made into an unfunded defined benefit fund (such as the PSS) will count towards the concessional contributions cap. For most people this is $25,000pa. The opportunity to make additional salary sacrifice contributions to another fund may result in a breach of this cap. This may incur penalties and additional tax. So if you are making contributions into another fund, other than the PSS, seek advice prior to 30 June 2017 to check that you are not going to be penalised under the new rules.
Is it all doom and gloom?
Andrew says, ”We don’t believe you should panic about the changes. The PSS is a generous scheme which provides members with the option of a lifetime pension on retirement. Reducing your contributions into the PSS without due consideration is crazy, given many will still receive a generous lifetime pension on retirement. The only change is that they may have to pay additional tax on the income above the pension cap”, Andrew adds.
If you are a member of the PSS and are considering making changes to your contribution levels or are looking at which retirement option is best for you, seek qualified financial advice as soon as possible. Call Milestone Financial on 6102 4333 today.