The government’s proposed changes in the way superannuation funds are handled have sowed confusion even among financially savvy people. This move was their solution to their growing concern that the government is losing a good amount of tax revenue from the previous system. There’s also reason to believe that some people are exploiting the previous super scheme by accumulating as much asset in their pension fund as possible so they can pass it down to their kids, tax-free.

But whatever the reason may be, you should understand the implications of this new system and what it can do to your super if you’re affected by it.

What Changed?

The total super balance refers to all the super assets of an individual, including retirement savings and pension accounts. It’s basically the total amount in one’s super account.

On the other hand, the transfer balance cap refers to the limit on the amount an individual can put into their pension phase. Starting 1 July 2017, a $1.6 million cap will be enforced and anything in excess of that amount must be put into an accumulation account. Earnings on an accumulation account are taxed at 15%.

What makes this new rule a big deal is that the earnings gained in a pension fund are free of tax for your whole lifetime. So, imposing a limit on how much you can put in your pension fund is a huge downgrade for those who can put more than the enforced cap.

Another thing that makes this more complicated is in situations wherein the individual already has more than $1.6 million in their account. But for those who don’t have $1.6 million in their super balance, there’s no need to worry because they won’t be heavily affected by the changes.

The estimated individuals who will be directly affected by this new ruling numbers to around 110,000. But the new rules regarding the utilization of non-concessional contributions will affect everyone in the country.

The maximum non-concessional contribution an individual can make is lowered to $100,000 per year, instead of the previous $180,000. This makes it harder for those below the $1.6 million-mark to reach the said limit before their retirement. On the other hand, concessional contributions have also been reduced to $25,000 per annum, instead of the $30,000 to $35,000 limit.

Individuals who are about to retire should consider other avenues on where they can put their extra money, especially if their total super fund exceeds, or is nearing, the limit of $1.6 million. A member is also prevented from further adding a non-concessional contribution if their total super balance exceeds $1.6 million by 30 June 2017.

Conclusion

The new ruling on the balance transfer cap has introduced problems for those that exceed the $1.6 million cap. They have to find ways to redistribute the surplus savings or face additional taxes that will make the scheme disadvantageous to them. It’s highly recommended that they seek professional advice on how they can avoid incurring penalties and put to waste their hard-earned money.

While the new rule on the transfer balance cap limits the amount an individual can put to their pension, it provides a much fairer setup to everyone by preventing high-salary individuals from exploiting the tax-free benefits of the pension phase. Regardless whether you’re directly affected by the cap or not, you have to take note of the new tenet on the usage of concessional and non-concessional contributions to make sure you maximize its benefits toward your super.