Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 156

SMSF assets will not need segregating

The Turnbull Government’s first Budget has aimed its sights squarely at the superannuation accounts of wealthier Australians, but SMSFs may be well-placed to take advantage of the proposed changes. Retirees have the ability to plan and manage their tax settings in a single vehicle.

How much income does it provide?

Changes proposed to take effect from 1 July 2017 limit the amount that can be held in the tax-free pension phase to $1.6 million. Analysis of Accurium’s database of SMSF trustees preparing for retirement suggests this will impact around a fifth of trustees over 65.

This begs the question of what level of spending in retirement is sustainable for someone with $1.6 million in savings. Around a quarter of SMSF trustees using our services have indicated a desired annual budget in retirement of over $100,000.

Our research shows that superannuation savings of $1.6 million would be sufficient to give a 65-year-old male 55% confidence of spending $100,000 p.a. without outliving his savings. This assumes an asset allocation in line with the average SMSF and average Australian life expectancies. Due to their longer life expectancy, for 65-year-old females, the confidence level drops to 47%. These calculations allow for tax and age pension entitlements.

Many retirees will think a one in two chance of outliving their savings and falling back on the age pension is too great a risk. Retirees looking for greater confidence, say reducing that risk to only a one in 20 chance, would need an annual spending level of only $65,000.

DM Table1 200516

DM Table1 200516

^ Using methodology in Accurium’s SMSF Retirement Insights Volume 3 – Bridging the prosperity gap.

Transfer cap is not a limit on superannuation or saving

On a practical note, the $1.6 million cap on the amount that can be used to commence a pension does not restrict the amount retirees can hold in superannuation. It is just a limit on assets that will preserve a tax-free status. The excess can continue to be held in an accumulation account with earnings taxed at a concessional rate of 15%. For most people this remains an effective and relatively simple tax-efficient structure.

Some commentators have raised concerns about the complexities such as capital gains tax impacts of complying with the cap, particularly for those already in pension phase. However, this is where the flexibility of an SMSF means there is no need to sell or transfer particular assets in order to comply with the new limit. A member of an SMSF can have both accumulation and pension accounts supported by the same unsegregated pool of assets.

SMSF trustees moving into pension phase will need to commence a pension with an amount within the cap, leaving the rest in accumulation. There is no need to identify which of the SMSF’s assets are supporting the pension. For those already in pension phase, excess amounts can be rolled back to accumulation without the assets needing to be sold or allocated specifically, provided they are accounted for appropriately. In order to continue to receive tax-fee earnings, the SMSF will need an actuarial certificate providing the split of the SMSF’s income between tax-free and taxed at 15%.

This will provide flexibility in terms of withdrawals. Retirees who have balances in excess of the cap may want to keep additional withdrawals from the pension account to a minimum. They can continue to draw on their accumulation assets in the form of lump sums if additional cashflow (above the minimum) is needed.

While the introduction of this cap will potentially limit the tax concessions, a retiree with $2 million in superannuation is likely to pay around $3,000 a year more in tax, although they will still be able to use the franking credits from the whole portfolio.

The added complexity of the proposed changes will make retirement planning more difficult, although SMSF flexibility should continue to make them a popular option. Advisers and accountants will have many opportunities to help their clients, and asset ‘location’ may become almost as important as asset allocation for many SMSF trustees and advisers alike.


Doug McBirnie and is a Senior Actuary at Accurium. This is general information only and is not intended to be financial product advice. It is based on Accurium’s understanding of the 2016-17 Federal Budget Report and current taxation laws. No warranty is given on the information provided and Accurium is not liable for any loss arising from the use of this information.


Franking credits lament: was it worth it?

Superannuation and retirement policies

SMSF borrowing ban is a solution in search of a problem

May 24, 2016

Phil, The rationale for actuarial certification derives from the complexity of asset, liability, income, expenses, provisions actual and probabilistic which may change throughout and impact each other. The aim is to sort out, by proxy if you like assets supporting pension liabilities on a weighted average basis.
If you query this, you might as well question why independent accountants must sign off accounts annually at a substantial cost. This monopoly could be outsourced to actuaries, CFAs or MBAs.
Won't happen.

May 23, 2016

This seems to be in conflict with the comments of Kelly O'Dwyer who stated that the $1.6 would not be capped after the pension has started .

also why is an actuarial certificate needed for what is a simple apportionment calculation

May 20, 2016

Doug deserves thanks for clearing up the many self-inflicted confusions about super after the $1.6 million tax-exempt pensions cap. Hybrid funds with both accumulation and pension phases for members have been around, with segregated or unsegregated assets, the latter requiring annual actuarial certification. This would not change under the budget.

A legal way to achieve 100% tax exemption in hybrid funds (subject to complying with the fund rules as well as the flagged $1.6 million and life-time $0.5 million NCC caps) is to commute pensions and recommence on the day a contribution is received. Alternatively, multiple income streams may be run with each contribution. In either case, accumulation balances would be zero throughout the year everything being on pensions account, and 100% of earnings would be exempt. No actuarial certificate required.

May 20, 2016

As SMSF Tee says this is the problem most women with broken work have not been able to accumulate deducted + earnings of the $1.1m which together with the $500k would give you the $1.6M .

SMSF Trustee
May 19, 2016

But what if one of the married couple is up to $1 million but has used up the non-concessional limit of $500k already? You can't just transfer another $600k because that person is in the same SMSF as his/her spouse. The limits are individual based, not fund based.

May 19, 2016

Peter, for a couple you can also add another $800,000 invested outside super at 5% returning $20,000pa each, and so within the tax-free threshold.

In effect, it's $4m per couple giving $200,000pa tax free - more than enough to get by on.

May 19, 2016

For married couples with a joint SMSF the $1.6m cap becomes $3.2m assuming that it is possible to transfer between the 2 accounts if 1 is greater than the other. If this is the case then what is the problem? At 5% return an annual tax free income of $160,000 should surely be enough for anyone in the pension mode.

Ashley Owen
May 19, 2016

Assumes ‘savings’ for retirement (ie the proposed cap of $1.6m) is SMSF assets and nothing else. Most of the wealth in Australia is and always has been outside SMSFs and outside super in general.

Also, I assume the confidence/probability bands apply to the investment returns and not to the longevity as well – ie when it says 55% probability of $100k withdrawals (indexed I presume) from a $1.6m fund will outlast a 65 year old – this assumes he only lives to his median life expectancy. It probably only refers to the variations in possible investment returns. But there is also a 50% chance of outliving his median life expectancy, So if you add that additional 50% likelihood of failure you get a low probability the fund will outlive his actual life.

Doug McBirnie
May 20, 2016

Hi Ashley

You raise a very good point about how longevity risk is allowed for in retirement projections. Most models we have seen in the market assume a fixed lifespan with no allowance for the (very high) probability that the retiree will live longer (or shorter) than this.

Accurium's models retirees' lifespans stochastically to allow for this risk. That is, the confidence levels quoted include the probabilities that retirees will live to a whole range of ages.

The link to our recent research paper explains the modelling in more detail if you are interested.




Leave a Comment:


Most viewed in recent weeks

Are you caught in the ‘retirement trap’?

Our retirement savings system is supposed to encourage financial independence but there is a ‘Retirement Trap’ due to the reduction of age pension entitlements as assets and income rise.

The power of letting winners run

Handling extreme winners is a complex task. Conventional wisdom such as “you never go broke taking a profit” often leaves a lot of money on the table as strong growth stocks continue to run.

Tony Togher on why cash isn’t just cash

An active manager of cash and fixed interest funds can achieve higher returns than the cash rate through a selection of other securities while managing both liquidity and income for clients.

NAB hybrid: one says buy, one says sell, you decide

Differences of opinion make a market, and hybrid specialists disagree on the likelihood that NAB will call one of its hybrids early. It makes a major difference to the expected return on NABHA.

Watch your SMSF’s annual return this year

The best way to preserve your SMSF’s favoured status is to make sure the fund’s annual return reaches the ATO on time. There are new rules this year that every SMSF trustee should know.

Worshipping at the altar of alternative assets

Investors worried about an overvalued sharemarket and low interest rates on term deposits and bonds are focusing on alternatives. What are they and how are they used by leading asset allocators?

Latest Updates


Kunal Kapoor on different paths to investor success

The Morningstar CEO on democratising investing, why saving in your youth is crucial, and why most investors care more about paying off their debts than comparing their results against benchmarks.

Investment strategies

Do sin stocks really give your portfolio the edge?

Should sin stocks, those companies who engage in activities that are considered unethical or immoral, be excluded from a portfolio, or would this compromise potential performance?


What is the likely effect of COVID-19 on the Australian economy?

Our close links to China mean the impact of the virus could tip the local economy into recession and certain sectors such as resources, education and travel will be harder hit than others.


Poor pricing of life insurance products and the impact on Australians

The use of discounted pricing by insurers to attract new business is unsustainable and leaves existing policyholders on higher premiums for what is essentially the same product.


Spotting signs of trouble in a retirement portfolio

Do you risk paying a lot of tax in accumulation phase? Or, if you're in retirement phase, do you face the risk of outliving your asset pool? Two key things to consider in the low-rate world of today.