Viewpoint by Peter Kelly, Superannuation, SMSF and Retirement Specialist
The superannuation changes coming into effect on July 1, 2017 are the most significant in a decade. What are the changes and the issues that advisers need to be discussing with their clients?
The changes are significant in their impact on how, and how much, you can contribute to superannuation over a lifetime, and how much you can transfer and hold in the tax free pension phase. They will affect clients in different ways, depending on their personal circumstances and plans.
The key changes are:
- $100,000 annual cap on non-concessional contributions
- Concessional contributions limit for everyone reduced to $25,000
- Non-concessional contributions restricted to those with less than $1.6m in superannuation
- Amounts held in pension accounts will be limited to $1.6m
- Investment earnings of transition to retirement pensions to be taxed at 15%, the same as super accumulation accounts.
One of the more controversial changes proposed in the May 2016 budget – imposing a $500,000 lifetime cap on non-concessional (after-tax) contributions – is not proceeding. It has instead been replaced with a $100,000 annual cap on non-concessional contributions. However, only individuals with less than $1.6m in super will be allowed to make non-concessional contributions after 30 June, 2017.
A trade-off for abandoning the $500,000 lifetime cap on non-concessional contributions will see the 2016 budget proposal to abolish the super contributions work test for individuals aged 65 and over not proceeding. The reform to enable people with less than $500,000 in super to bring forward unused concessional contributions caps has been delayed until July 1, 2018. When introduced next year, this reform will appeal to many Australians unable to maximise their annual concessional contributions for a variety of reasons, including having broken work patterns or simply not having funds available to contribute to super.
Super remains a very tax-effective investment
For most Australians, superannuation remains the best wealth accumulation structure from a tax perspective. On top of the income tax benefits available on contributions, superannuation in the accumulation phase pays maximum tax of 15% on investment income and no tax when a super fund is paying a pension to its members.
However, given the reduction in the amounts that may be contributed, it may be smart for people to start accumulating wealth for retirement sooner rather than later.
The Association of Superannuation Funds of Australia (ASFA) estimates the costs of a modest and a comfortable retirement. For a couple, the budget for a comfortable retirement is currently just shy of $60,000 per annum, and they will need $640,000 to support this lifestyle, assuming they are debt-free and are entitled to a part age pension.
Based on this estimate, the current superannuation contributions caps are more than adequate for a couple to accumulate sufficient superannuation savings over their working life to support a comfortable lifestyle in retirement.
Clearly, those looking to build their wealth and fund a more affluent retirement lifestyle may not have access to the same degree of tax concessions previously available, and an examination of alternative non-super wealth accumulation strategies may be appropriate in some circumstances.
With forward planning and appropriate advice, most Australians will be able to build an adequate retirement nest egg within the contribution cap constraints that will apply from July 1, 2017.
Three things advisers need to be discussing with their clients now
1. Maximise concessional contributions before July 1, 2017
Concessional contributions are currently at a maximum of $35,000 for individuals who were 49 or older on 30 June 2016. For everyone else, the limit is $30,000.
An opportunity to make concessional contributions of up to $30,000 or $35,000 is available up until 30 June 2017.
From 1 July 2017, the cap will be $25,000.
2. Maximise non-concessional contributions before July 1, 2017
The cap for 2016-17 is $180,000. For people under age 65 (at July 1, 2016), they can bring forward a further two years contributions, totalling up to $540,000 before June 30, 2017.
From July 1, 2017, the non-concessional (after-tax) contribution cap will reduce to $100,000, with a maximum of $300,000 being able to be contributed under the three year bring-forward rule. As well, the ability to make non-concessional contributions will be limited to those with less than $1.6m in superannuation.
3. Review Pensions before June 30, 2017
The $1.6m limit on the amount held in the retirement (pension) phase is retrospective. That is, it applies to existing pensions as well as those established in future.
This means that the excess over $1.6m will need to be retained in an accumulation account where the investment earnings are taxed at 15%. Alternatively, all or a part of the excess may be withdrawn from super and invested in the individual’s own name with earnings taxed at their marginal tax rate, or through another structure such as a family trust or private company.
It would be worthwhile for advisers to review client pension account balances above $1.6 million and roll back excessive pension account balances to an accumulation account before July 1, 2017.
For clients with self-managed superannuation funds, advisers should be reviewing the investments that are supporting pension liabilities and looking to take advantage of the capital gains tax relief available where pension balances are being rolled back to an accumulation account.
Join the Masterclass
At the March Masterclass, I will be examining the $1.6m pension transfer balance cap, and the capital gains tax relief in more detail.