Transferring Large Pensions into Superannuation from Overseas
While the new Superannuation regime which came into place in 2007 improved and simplified many aspects of superannuation, the caps introduced on non-concessional contributions (NCC) greatly restricted the ability to efficiently transfer larger pension balances into Australian superannuation.
With effect from 1 July, 2017 NC caps were further reduced to $100,000 per annum, although if you were under 65 years of age you could bring forward two years worth of contributions, meaning that you could contribute $300,000 as one lump sum over a three-year period - with no NCCs generally possible if your total super balance exceeded $1.6M - referred to as the "transfer balance cap" (TBC). Transferees who were 65 years of age and over could only contribute a maximum of $100,000 per annum, subject to meeting a "work test" and with no "bring forward" flexibility.
The NCC cap is now currently $110,000 per annum and the TBC increased to $1.7M on 1 July, 2021 - with no " work test" applying from 1 July, 2022 in relation to non-concessional contributions up to age 75; although the work test still applies in relation to concessional (pre-tax) contributions. So, a continuing number of changes in super but they have generally provided more flexibility when it comes to transferring large overseas pension balances into super. Note that both NCC caps and TBC are poised to increase again on July 1, 2023 - with the TBC increasing to $1.9M on the back of inflation. The TBC effectively places a limit on super funds in pension mode which are exempt from taxation.
In the past, there had been some hope that the Government would make some allowance for expatriates, including a higher ceiling or an exemption to reflect the fact that an expatriate may be transferring many years of pension accumulation. However, Governments of neither persuasion appear receptive to expatriate concerns, and we have a perverse situation in which countries like the UK potentially allow the transfer of much higher sums out of the country than can be accepted by an Australian fund in a single transfer.
The first response to this situation is usually to consider the "drip feeding" or staggered payment of overseas funds into the Australian superannuation account. With large sums this can take quite a long period, but the main problem is that pension funds, particularly defined benefit schemes, will usually not support the approach and require single payment transfers. Additionally, the ability to have any transfer taxed at 15% within the receiving superannuation fund is dependent on the transferee having (sic) "extinguished their interest in the sending fund". Thus, even if the sending fund was inclined to support a drip feed approach the tax consequences might be very disadvantageous. Similar issues can attach to transfers from the US (involving 401k's, 403(b)'s and IRA's), and from South Africa and Europe.
These problems are capable of being addressed by effective and detailed planning which takes into account individual pension and tax consequences both in the sending country and Australia, and sometimes intermediary funds offshore. This involves a qualified financial planner with substantial experience in this field drawing up a proposal which precisely plans how the transfer should be made to Australia - including amounts, timing and costs - which is agreed by the client (and their adviser if appropriate) before the process is initiated.
Very recently there has been some additional flexibility offered in situations where an individual has a relatively low super balance (often the case with long term expats and migrants) or where expats aged 55 plus are selling their main residence, to make what are called "downsizer" contributions of up to $300,000 into super.
Professional advice of this nature represents a cost, but clients will be provided with both an outline proposal and quotation for professional fees before any decision is taken to proceed. Our view in this area is that we will not simply administer the multi-year transfers of large sums without the sign off of a financial planner or similarly experienced professional - the amounts of money involved, and the complexity of the issues, require experienced and professional advice. In addition, the advantages of transferring funds into Australian superannuation will normally more than compensate for the cost and time involved in proper planning.
For expatriates and migrants wanting to transfer funds, but concerned that current exchange rates are poor, there is also the potential to transfer funds into an Australian superannuation fund but leave investments and funds in your existing currency. Giving you the option to make any conversions into AUD as and when you believe it is most advantageous.
|NOTE: The UK Government has announced the abolition of the Lifetime Allowance Charge (LTC) as from 6 April 2023. This is the 25% tax on the amount over the pension member's Lifetime Allowance levied on transfer to an Australian QROPS. This only impacts individuals who have large UK pension pots over the applicable protected LTC, but the abolition of the LTC will make some transfers more economic and simplify transfer planning.|
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