THERE has been so much “noise” around the Coalition’s proposed superannuation changes that it has been causing unnecessary confusion with investors.
So lets take the political spin out of it and look at the winners, the losers and what it means for your retirement planning.
First up, remember these changes are simply “proposals”.
They aren’t law, they haven’t even been put to, or been passed by, Parliament.
If the Coalition loses the election then the changes are dead and buried, and even if they are re-elected it looks as though they may not control the Senate so could be rejected anyway.
The odds are that the changes are unlikely to be implemented in their current form.
It’s likely there will either be no change or the changes will be watered down to get through the Senate.
The rationale behind the proposal is that the superannuation system is over generous to rich Australians and the changes will save the Government $6 billion over four years.
But what if they are implemented?
Here’s what the proposed changes mean for you.
Concessional (pre-tax) contributions
The Government has proposed reducing the concessional contributions cap to $25,000 from the current maximum of $35,000.
That means your maximum annual contribution to super may be cut by $10,000 after 1 July 2017.
Until then, the current $35,000 cap for over 50’s still applies.
On top of this, people with combined incomes and super contributions of over $250,000 will have those contributions taxed at 30 per cent rather than 15 percent.
Currently, this only applies to people earning over $300,000.
If the $25,000 concessional cap is not reached in any one year, the new regulations would allow people with super balances below $500,000 to carry forward the unused portion of their cap over for up to 5 years.
So they can catch up.
If implemented after 1 July 2017, this could create innovate tax planning opportunities to help minimise capital gains tax on the sale of investment property.
The challenge now is that changes to the concession caps means that people need to be thinking about their super earlier.
A lot of people wait until their latter years when they’ve cleared their mortgage and no kids to start ramping up their super, but this may need to change.
Non-concessional (after-tax) contributions
Under the current rules, you can make up to $180,000 in after-tax super contributions every year, and it’s possible to bring forward three years’ worth of contributions to kick in up to $540,000 at once.
The plan is to change this to a lifetime cap of $500,000, which is predicted to at least 42,000 people, if not more.
People who have planned their strategy around catching up on their contributions at a later point in time, or have gone through a divorce, may end up being disadvantaged more so than others, which introduces a new form of inequity.
The government is seeking to cap retirement phase accounts, or pensions, at $1.6 million a person… a change estimated to impact just 1 percent of super fund members.
This adds up to $3.2 million for a couple, so the pension caps are not a major issue for most retirees.
These retirement phase accounts currently pay no tax on investment earnings, but under the new regulations super balances above $1.6 million per person would be held in a separate account with earnings taxed at 15 percent which is still well below marginal tax rates.
This money can also be withdrawn and invested elsewhere.
Transition to retirement pensions
Workers aged 56 to 64 are allowed early access to their super funds as they transition into retirement.
This means they can reduce their working hours without reducing their income by topping up out of super.
Currently, earnings from this transition account are tax free as well, but the Coalition’s changes would introduce a 15 percent tax on fund earnings.
This is estimated to affect around at least 115,000 people.
Winners and losers
As you can see, some of these changes will only impact high income earners.
‘Losers’ include people earning over $250,000, people making more than $25,000 in concessional contributions or $500,000 in lifetime after tax contributions, or those with a superannuation or pension balance greater than $1.6 million.
For the rest, it’s pretty much business as usual.
However, the key message is you need to aim to contribute up to your maximum annual level for longer … there is less room to delay and catch up later.