While defined benefit pensioners now know precisely how the Australian Tax Office will value their pension in applying the new $1.6 million superannuation cap tax changes, the valuations for current contributions and deferred benefit members’ entitlements are still works in progress.
To recap, in a one-size-fits-all approach, defined benefit fund pensioners’ valuations are assessed at 16 times the annual pension at July 1, 2017. This methodology makes no allowance whatsoever for the age of the pension recipient or the indexation arrangements of the pensions. Given the widely different ages of the pension recipients and the varying indexation arrangements, this approach has overvalued the entitlements of older recipients and favours younger recipients.
The tax office defined benefit fund valuations treat current contributors and deferred benefit members more generously but only until they draw their pension. Once the pension is started, the 16 times annual pension valuation procedure applies.
In the meantime, the tax office valuations of defined benefit entitlements will be calculated largely on the basis that fund members opt to take the least valuable of the options available. For example, the tax office values current CSS (a fund closed to new members in 1990) entitlements as the total lump sum benefit available in a redundancy situation.
While cashing out the indexed pension entitlement lump sum option is available in this situation, redundant members also have the options of drawing a pension or preserving their pension entitlement to 55 and receiving larger benefits. This valuation procedure ensures that only contributing CSS members with very high salaries and long periods of membership will trigger the $1.6 million penalty tax provisions while still working.
Similarly, tax office valuations of accumulated benefits of current PSS, MSBS and DFRDB members do not reflect the values of their pension entitlements. This provides opportunities for defined benefit fund members to boost their private super accounts before they access their defined benefit pensions.
Those wanting information about the scope available to boost private super benefits will have access via the tax office’s MyGov website to valuations of their existing superannuation benefits. This data will include the value of both defined benefit and private superannuation entitlements.
The defined benefit funds will, however, only start providing information about members’ entitlements to the ATO when their 2016-17 accounts are finalised later in the year. Obtaining these valuations is not an urgent issue for most current defined benefit members, but they need to be aware that the valuations of their super benefits will jump markedly when they commence a pension.
An excellent example is that a PSS valuation of $1 million while still employed would jump immediately to $1.6 million if the available $100,000 annual pension is commenced at age 65.
Daryl Dixon is the executive chairman of Dixon Advisory. firstname.lastname@example.org