Changes to super legislation, their implications and options to consider.
If you earned a dollar for every article about the super changes over the past year, you wouldn’t have to worry about your super. You’d have enough to retire on.
There’s been no shortage of commentary – but are Australians better informed or just more confused? We wanted to know the answer. So we asked 2700 Australians how they felt about their super, as part of Perpetual’s How Do You Feel? project.
As the name suggests, the purpose of this research was to find out how people feel about the main events and circumstances in their lives. What are the secrets of happiness and success? There are some intriguing and useful insights which we will share with you in future editions of The Private Practice magazine.
But for the moment, let’s get back to super.
The finding we found most surprising related to tax – less than 10% of the people surveyed recognised how tax effective super could be.
We dug a little deeper and looked at those Australians who identified as being financially secure. What was their view on super? On balance, they recognised that super was a good safety net for their retirement and felt comfortable with their level of savings. Did they understand how tax effective it could be? No.
A super place for your retirement savings
For every dollar you earn, would you prefer having 85 cents or as little as 53 cents working for you?
This question goes to the heart of super’s tax benefits, particularly for high income earners. Earnings derived from assets held through super are taxed at a maximum rate of 15% – any income generated on assets supporting a retirement phase income stream is tax-free. Outside the super system, your earnings can be taxed as high as 47% (including Medicare levy). That’s a big difference – and there’s more.
The tax-effectiveness of super extends beyond the low tax rate on investment earnings. From age 60, all benefit payments received, either as a lump sum or an income stream, are generally tax-free. Tax may apply to certain benefits received from an untaxed source, e.g. an untaxed defined benefit fund.
Super is still the most tax effective vehicle for accumulating retirement savings. The catch is that the government has made it more difficult to get your money into the super system.
Not so super - recent legislative changes
Here are some of the recent changes that could catch you out and leave you with a nasty tax bill:
- The amount you can contribute to super before-tax (concessional contributions (CCs)), which include salary sacrifice, employer and personal deductible contributions, has dropped from $30k ($35k for those aged 50 or above) to $25k per annum for everyone.
- The amount you can contribute after-tax (non-concessional contributions (NCCs)) has been cut from $180k to $100k per annum.
- Once your total super balance (TSB) hits $1.6m you can’t make any additional after-tax contributions (excluding those related to certain small business capital gain tax concessions and compensation or damages for personal injury).
- If you earn $250k or above, you pay an additional 15% tax on your CCs.
What does this mean for you?
The changes to super have two consequences for people approaching retirement:
- More risk – if you are making super contributions above the new limits you may receive a nasty tax bill.
- Tighter caps – the new rules mean you need to plan ahead and contribute over the longer term rather than wait until a few years before retirement.
If stricter contribution limits affect you, now is the time to speak to an expert who can help you implement the tax and super strategy that suits you.
Options worth thinking about
Two options you may want to consider:
- Utilising the ‘bring-forward’ rule to expedite your super contributions. If you are under the age of 65 and have a TSB less than $1.4M, you may be able to bring-forward up to three years’ worth of NCCs into your super. If your TSB is between $1.4M and $1.5M, you may be able to bring-forward up to two years’ worth of NCCs into super.
So instead of contributing a maximum of $100,000 in one year, you may be able to bring forward your contributions for the next few years and contribute up to $300,000 into your super. Earnings from the investment of that $300,000 will be taxed at a maximum of 15% compared to paying personal income tax at up to 47% (including Medicare levy).
- With the reduction to contribution caps, consider directing your surplus income into alternative investment structures. Whilst potentially not as tax-effective as super, investment structures such as family discretionary trusts and insurance/investment bonds can provide greater flexibility particularly for people who wish to access their money before their superannuation preservation age.
Perpetual Private advice and services are provided by Perpetual Trustee Company Limited (PTCo), ABN 42 000 001 007, AFSL 236643. This publication has been prepared by PTCo and may contain information contributed by third parties. It contains general information only and is not intended to provide advice or take into account personal objectives, financial situation or needs. The information is believed to be accurate at the time of compilation and is provided by PTCo in good faith. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.
Speak to a super expert
A financial advisor can help you cut through the complexity of super and ensure you have the right strategy in place for your personal circumstances. For an introduction to Perpetual Private and referral to a Perpetual Specialist Medical Senior Adviser, please send an email to email@example.com or phone 1800 631 381.