Superannuation changes, which take effect on 1 July could have a massive impact on workers, particularly the wealthy, and many may end up paying more tax.
The news is not all bad for Australians, and there are some opportunities to make smart financial decisions now that will put you in the driver's seat for your retirement.
We have analysed the superannuation changes and come up with some tips to help you understand what impacts these changes may have on your circumstances and your future plans.
Both concessional and non-concessional superannuation contribution options will be affected by the changes:
Depending on your age, the current rules allow you to contribute up to $35,000 to superannuation, which will be reduced to $25,000 if you’re claiming a tax deduction. This will make it harder to boost retirement savings late in your working life via concessional super contributions. It will also impact you if you're currently maximising your limit and you'll need to make adjustments to avoid breaching the new limit.
If you’re not claiming a tax deduction, you can currently contribute up to $180,000 per annum. This will be cut to $100,000 from next year and, depending on your total superannuation balance (see below), it may be cut to zero. Although a $100,000 annual limit may still seem generous, it may seriously affect your ability to contribute sufficient capital to your superannuation throughout your working life. For example, people who receive an inheritance or sell an investment property and want to contribute the equity into superannuation will have a reduced capacity to do so – particularly if you're approaching age 65 and in the latter stages of your working life.
Arguably the biggest impact as a result of these changes will be a limit on how much an individual can hold within a pension account. This limit will be initially $1.60 million and will be indexed over time. If your pension balance is above this amount, you'll need to either transfer the excess component back into your accumulation account (where earnings are taxed at 15 per cent, compared to tax free within a pension) or withdraw from super by 1 July 2017.
When it comes to contributions, if your total superannuation balance is $1.60 million or above, you will no longer be able to make personal (non-concessional) superannuation contributions. This is a big change as currently you could contribute $540,000 using bring-forward provisions. From 1 July 2017 this will no longer be possible and this will result in wealthy Australian’s being locked out of making additional non-concessional contributions into superannuation where earnings are taxed at a maximum of 15 per cent (compared to up to 49 per cent outside of super).
A popular strategy in recent years has been to convert superannuation into a transition to retirement pension, particularly from age 60 when pension payments are tax free. From 1 July the tax concessions within the superannuation pension account will be removed, incurring a 15 per cent tax on the income, which was previously tax-free. In some instances this may result in the transition to retirement pension strategy no longer being viable, while for other people this strategy may remain appropriate, even though it will not be quite as tax-effective as the current arrangements.
There is some good news
Some Australians will benefit from the new changes, including those contributing into a spouse’s superannuation fund and employees wanting to make personal concessional superannuation contributions.
Everyone’s circumstances are different and I advise people who are determined to fund their own retirement to speak to an adviser before amending their retirement plans. Start planning for your retirement early as making the right decisions now will more than likely benefit you in the long term.
Nick Andrews is a Financial Adviser with RSM Financial Services Australia Pty Ltd. (AFSL 238 282)