With the expectation of more changes to superannuation in the May Federal budget, particularly around contribution levels and contributions tax, now is a good time to review arrangements and ensure you make the most of the current rules, said Jonathan Philpot, wealth management partner with HLB Mann Judd Sydney.
“From comments so far, it would appear that the government is happy for people to build a reasonable sum in super and receive benefits of lower tax, but not to build an excessive amount in super,” Mr Philpot said.
“Typically, it takes a long time to build a reasonable amount in super, with many people not worrying about super at all until they are close to retirement.
“At that stage, in order to ensure there will be sufficient funds to retire, people will often choose to salary sacrifice and make large non-concessional (after tax) contributions – usually from their non super asset base – to build up their total super balance.”
However, with super changes mooted, this strategy may not work so well in the future, Mr Philpot said.
“Those who are engaged in their super at an earlier age will likely build large super balances over time. However the ability of those to build up larger balances later in life might be curtailed.”
But while many investors are asking whether they should take action now and make additional super contributions in anticipation of expected rule changes, Mr Philpot says there are some additional considerations.
“I would caution against borrowing to make large non concessional contributions to super before the May budget, particularly given the borrowing is not tax deductible.
“However, saving in super is a good idea, and if people are in a position to make large non concessional contribution, and in particular to make use of the three year bring forward rule of $540,000 each, then they should do this prior to the budget.
“The bring forward rule allows for three years worth of non-concessional super contributions to be made in the one financial year. With the annual non-concessional contributions cap set at $180,000, it means that $540,000 can be contributed to super, as a one off.
“It still surprises me that people are far more willing to invest into property in order to access the benefits of negative gearing and receive a tax deduction, when often they would receive a larger tax deduction if they considered either salary sacrificing or making personal super contributions.”
Superannuation isn’t the only saving option, however, especially for those who don’t want to tie up their money.
“If people are not comfortable making additional contributions into super, because money is locked away until retirement, a family trust may provide sufficient flexibility both from the tax planning and adding or withdrawing funds point of view.
“Family trusts are an extremely useful wealth building vehicle and may become more popular if super contributions are restricted in the future,” Mr Philpot said.
For those who are focusing on their super savings, Mr Philpot has some key tips.
“While life insurance in super might be recommended for the tax benefits, if premiums are taking up a large portion of contributions, it might be a strategy that people need to reconsider.
“Equally, the investment option chosen is important, with many people in public offer funds in the default option. If people are younger they should be more aggressive – if 30 per cent of super savings are held in a low earning investment for next 30 or so years, it will produce lower returns than a more aggressive investor.
“As well, it is important to regularly review your fund and the fees being charged. Those in older style super product may be paying high fees and not even realise.”
Finally, Mr Philpot said, it is worth considering whether a self managed super fund (SMSF) is the right choice for you.
“As the last few years have shown, younger people with lower balances are starting SMSFs earlier. There is no way to have greater control over your super than through a SMSF and I expect the popularity of the structure to continue to increase, regardless of government changes to the retirement income system.
“With advances in technology and streamlined administration, the costs of running a SMSF has decreased substantially over the years. From a cost point of view a SMSF is now a valid consideration anytime after your fund balance hits $200,000,” 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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