The changes to defined benefits taking many Australians by surprise

By now you’re probably well aware of the changes to superannuation laws which kick in July 1.

While there’s been a lot of focus on some of the reforms, such as the $1.6 million cap on superannuation balances, there’s one element that hasn’t been discussed much.

It turns out the changes will also impact retirees who receive defined benefit pensions.

Nerida Cole from Dixon Advisory said this has caught a few people by surprise.

“What has happened in the past, is that superannuation changes have often been primarily focused on the normal accumulation style super accounts,” she said.

“When the government released the budget and outlined changing the rules in May, in the small print they said they would also work out how to bring defined benefit pensions into the regime.”

So, what are the changes?

Well, to try and make the system even, the government has tried to work with the $1.6 million cap that will apply to the normal everyday super accounts.

To do this, they’ve worked out a formula.

 “They take your annual gross defined benefit pension and times it by a factor of 16,” Cole said.

“Whatever that figure comes to will count towards the $1.6 million that is able to be held tax free in the retirement pension phase of superannuation.

“So if you have a $60,000 annual defined benefit pension, that would equal $960,000 – meaning you could only have another $640,000 in your SMSF retirement pensions.”

If it sounds complicated to you, don’t worry – you’re not the only one confused by the changes.

Cole said the changes were catching many people out.

“It’s been a little bit of a shock to some people realising that both types of money (defined benefits and ordinary accumulative super) would be added together,” she said.

“A lot of people are just starting to understand that this could mean they have to make changes to their super prior to 30 June 2017 and that the valuation may cut them off from being able to make extra contributes to super in the future.

“Some people are pointing out that defined benefits aren’t like normal super which is tax free from 60 onwards and they feel like that hasn’t been taken into account with these changes.”

If you have a defined benefit pension and worry you might be affected by the changes, there are a few things you can do to prepare for the July 1 changes.

“People really need to start getting their heads around how they will work (defined benefits and super) together within the new rules,” Cole explains.

“To understand how that will impact your retirement goals, getting advice from experts in defined benefit super is essential.

One option may be to get as much money into super before this formula is applied on July 1.

“For some this will mean a change in strategy to bring contribution plans forward and for others the good news is you may already have contribution plans in place.” ”

Do you have a direct benefits pension? How will these changes impact you?