Next financial year, big changes are on their way to super – with the tax-free nature of parts of the super system to be limited.

The government has changed the way that superannuation pensions, and transition to retirement pensions (TRIPs), are treated.

Effective from July 1, 2017, the government has placed a $1.6 million cap on the amount of superannuation that you can keep in, or transfer to, a super pension account – where the tax rate on earnings is zero.

These changes apply to self-managed super funds (SMSFs) as well as other kinds of super funds.

The cap, known as the transfer balance cap, will apply to all Australians: those who are already receiving superannuation pensions, and those starting pensions on or after July 1, 2017.

The changes became law in November. SMSF members who are immediately affected, and those planning for retirement, need to be aware of how the new rules will affect their financial plans.

If an SMSF member has more than $1.6 million in pension phase, then they have two options:

·      Move the excess super savings into an accumulation account, where investment earnings will be taxed at 15 per cent, or

·      Withdraw the excess amount (that is, above $1.6 million) from the super system.

Any excess held in pension phase on or after July 1, 2017 will incur a tax penalty, with earnings taxed at 15 per cent.

In theory, the individual cap means that a couple running an SMSF could potentially retain $3.2 million in pension-phase assets. There may be scope to split assets, to bring the higher-balance member of a couple under the $1.6 million cap.

Transition-to-retirement pensions (TRIPs) have had their tax exemption removed. TRIPs have been popular because they have enabled people who have reached their preservation age to gain access to their super in the form of a pension, while continuing to work, and continuing to make super contributions.

They can work full-time, part-time or even casually while using a TRIP.

In the TRIP structure, you contribute part of your salary to your SMSF (where it is generally taxed at a maximum of 15 per cent, rather than at your marginal tax rate). You then move your super money into the TRIP pension and use the pension income to supplement your reduced salary. The tax-effectiveness of the pension helps to lower your overall personal tax liability.

However, from 1 July 2017, the earnings on assets financing a TRIP will no longer be exempt from tax.

Also, it will no longer be possible to treat an income payment from a TRIP as a lump sum withdrawal and access the tax-free low-rate cap of $195,000. Lump sum withdrawals will still be possible, but they will not count as meeting the minimum payment standard.

Because TRIP users will have to pay tax on the earnings from 1 July 2017, it means that they will need to keep additional cash to pay any tax on the earnings. (They will also receive less franking credit refunds, as they will only get back half the credits in future.) This extra cash should be earning as much as possible.

SMSF owners using a TRIP will continue to lean heavily on their cash accounts, both in the sense of the term deposit holdings that make up the core of their cash investments, and the cash accounts that they use to park money as it moves between accumulation and pension phase, and also, between asset classes – for example, when the SMSF sells shares to boost its cash holding, or when the tax-effective dividend flow from the SMSF’s shares is collected in a cash account on the way to funding pension payments.

Your SMSF always needs somewhere to park money, and there are several options to help with this, with products such as the RaboDirect High Interest Savings Account, the Notice Saver and the Premium Saver.

And for your SMSF’s core long-term cash holdings, Rabobank offer a competitive range of term deposit products.

In both cases – the cash investments, and the cash accounts that are used for the SMSF’s housekeeping requirements – make sure that you’re earning the best interest rate that you can. Cash is a competitive market, in which rates are often changing: it pays to make sure that your SMSF is not short-changed.