Most of the proposed changes to superannuation announced in the recent Federal Budget were unexpected, and people will now need to consider different strategies if they are to meet their retirement goals, said Jonathan Philpot, wealth management partner at HLB Mann Judd Sydney.
“There was clearly no consultation with the industry prior to the announcements, and there are significant short and long-term repercussions to what the Government has proposed.
“The big question for many investors – particularly those approaching retirement – is what should they be doing now.
“Perhaps the biggest adjustment that will come out of the changes is that almost every Australian will now need to be more engaged and proactive with their superannuation and retirement planning,” Mr Philpot said.
There are three main circumstances to be considered:
Retirees with pension balances in excess of $1.6 million
While the changes will disadvantage large pension accounts, there is a silver lining or two, Mr Philpot said.
“Firstly, the excess amount over $1.6 million that will be transferred to the ‘accumulation’ account will be taxed at 15 percent on the taxable earnings. This is lower than the first taxable tier of individual tax rates of 19 percent plus Medicare levy – so it is likely to still be a better outcome than an investment made outside of super.
“Secondly, as a pension is not required to be paid out of the ‘accumulation’ account, this can stay invested at the 15 percent tax rate which may be an advantage to some.
“For instance, retirees later in life often find that the minimum pension withdrawal is well above their spending requirements. Consequently, they will often build an investment portfolio in their own name that may push their individual taxable income to the 19 percent, or higher, tax bracket. This change will be beneficial to such retirees.
“However, the tax-free threshold for non-superannuation investments also needs to be considered. Someone with a pension balance of around $2 million may be better off withdrawing the excess $400,000 and investing in their own name.
“This is because – assuming five percent taxable earnings – this would generate $20,000 in taxable income which for a retiree is tax-free (including the low income tax rebate).”
Mr Philpot said such a strategy would save approximately $3,000 in tax compared to leaving in the super account. For a couple, this could total $6,000 per annum.
$500,000 lifetime cap for non-concessional (after tax) contributions
“This change affects many people and it effectively stops all non-concessional contribution activity until we know whether it will be legislated,” Mr Philpot said.
“The retrospective aspect of the proposal is extraordinary. Taking it back to 1 July 2007 makes it very difficult for people to track past non-concessional contributions and it will be necessary to rely on the ATO to provide these figures, which is not a good position to be in.
“For many, the chance to substantially boost their super balance depends on the sale of personal investments, property, shares or the proceeds of an inheritance close to retirement age. This change will make it very difficult, if not impossible, for such people to boost their superannuation balance close to retirement.
“Women who have taken time out of the workforce to raise a family will be particularly hard hit by this change.
“Limiting this sum to $500,000, particularly for those who only have a low super balance as they approach retirement, will now mean they may have only a portion of their investment wealth in the well-regulated super environment and the remainder will need to be invested outside of super in their own name.
“Many people prefer having only one investment portfolio to monitor and draw a living from, so this change adds complexity and will often result in a poorer investment outcome. It may also lead to many people currently exempt from lodging a tax return now having to do so.”
He added that if a person was unable to contribute the $500,000 earlier in their working life, they will find it very difficult to even build a super balance of $1.6 million, particularly if they are now aged 50 or over.
Reducing the concessional contributions to $25,000 from 1 July 2017
While this change will not have the immediate impact of the lifetime cap, over a longer period of time it will result in a significantly reduced super balance, Mr Philpot said.
“For many people it is not until they reach mid-50s – and mortgages and school fees are out of the way – that they are in a position to substantially increase super contributions.
“We estimate a person aged 50 with a current super balance of $100,000, could have built a super balance of $1 million by age 65 under the old rules with maximum concessional contributions. The lower $25,000 limit will result in a balance of approximately $800,000 at age 65.
“It will be important for those who are in a position to maximise their concessional contributions for the 2016 and 2017 financial year, to do so while the higher limits still apply.”
Mr Philpot added that unless people now consider increasing their super contributions at a much earlier age, they are unlikely to be able to build a super balance even close to the $1.6 million ‘cap’ the government has proposed for pensions.
“People in their 40s will need to consider making the maximum concessional contributions into super. This may result in greater engagement with their super, including closely monitoring not only contributions but also investment performance and fees.
“Conversely, for those not paying attention, it may result in a significantly lower super account balance on retirement,” Mr Philpot said.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.
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Phone: 02 9020 4196