Interest in defined benefits pick up pace

Enquiries around defined benefits have grown the most in the December quarter according to BT Advice Technical’s round-up of adviser queries.

The leading queries to the BT Advice Technical team for the December quarter are:

• Defined benefit pensions
• $1.6 million transfer balance cap

BT’s Technical Consultant Tim Howard said that the fastest growing area of enquiry from advisers has been around clarification of non-account based pensions, particularly defined benefit pensions.

“As defined benefit pensions generally have no lump sum equivalent, we’re seeing growing interest around how they will be treated and particularly, how it will interact with the $1.6 million cap.

“The good news is that there is a simple way to determine this and it’s actually pretty straight forward. You calculate the total balance of a defined benefit pension for the purpose of the $1.6 million transfer balance cap by multiplying the annual income stream by 16, if it’s a lifetime pension, or by its remaining term if it’s a fixed term pension” said Howard.

For example if a lifetime defined benefit pension pays a client an initial annualised payment of $90,000 it’s equivalent to a value of $1.44 million. This means the client has $160,000 of wriggle room before reaching the $1.6 million cap.

Following defined benefit pensions, the $1.6 million figure continues to be a regular enquiry from both advisers and clients, Howard says.

“There is a bit of confusion around what the figure means, and there is a misconception that this refers to a limit around how much you can save in superannuation, but that’s not the case” Howard advised.

“The $1.6 million represents the figure in retirement phase, after which any excess needs to be moved back to the accumulation phase, where it will be subject to 15 per cent tax on earnings, or removed from superannuation. In addition, and as a separate measure, individuals who have greater than $1.6 million in superannuation will no longer be able to make non-concessional contributions from 1 July 2017” said Howard.

Information is current as at 3/1/2017.