What to do with falling superannuation contribution caps
Written and accurate as at: Feb 03, 2016 Current Stats & Facts
Link to Video
Video: Morningstar's Christine St Anne and David Simon
Video Transcript
Christine St. Anne: The government recently announced a number of changes to superannuation. Today, I'm joined by Westpac's David Simon to discuss these changes and strategies to best maximize your superannuation. David, welcome.
David Simon: Thank you, Christine.
St. Anne: David, the government recently made a number of changes to the contribution caps. What are the implications of these changes?
St. Anne: Yeah Christine, there are three primary considerations that members need to consider about superannuation, and predominantly those are over the age of 50 are really going to be impacted. So there are three considerations and implications that they need to consider. Certainly, transition to retirement, strategies need to be reviewed quite immediately. Their actual contributions themselves need to be reviewed and indeed, consideration around that actual nest egg and what the end result will be need to be reviewed.
So to detail those out, the transition to retirement strategy, a lot of members that are currently over the age of 55 years of age are contributing around 50 - are up to their maximum contribution of $50,000 into superannuation. They are attracting a concessional tax rate of only 15% on those contributions. Whilst they are going into superannuation, these members who're actually subsequently drawing a concessionally assist income from their pension to supplement the actual sacrifice into super and they are affectively in a much better and advantageous tax situation by doing that. Due to the government reducing their contribution cap limit from $50,000 to $25,000 they are affectively halving the benefit for those transition to retirement strategies, so they no longer as effective as they once were.
The other consideration is obviously for people that are making those contributions of $50,000 into super at the moment that aren't event doing the transition to retirement, so indeed those people from the age of 50. So whether they're making salary sacrifice contributions, or whether they are self-employed and making personal deductible contributions, and of course, inclusive of their existing employer contributions it all wraps up to make that $50,000 before tax. For those over the age of 50, it's no longer be going to $50,000, so they need to desperately reconsider their strategies and get it down to that cap of $25,000. Indeed if they don't, they will be hit with those penalties around excess tax on contributions.
And finally, the other implication, which is the most important one I suppose is what it's all going to mean to their retirement nest egg when they need the money most. They can no longer contribute as much money as they were previously, so, are they still able to meet their retirement aspirations with that?
St. Anne: So, against all these challenges David, will we see people, perhaps doing a bit more contribution splitting?
Simon: Yeah, look that's a really good point. So in 2014, there's going to be a $500,000 threshold. So basically for those members that are over the age of 50 and have less than $500,000 invested in superannuation, they will then again be entitled to access that $50,000 cap, which includes their salary sacrifice, self-employed deductible contribution, and employer contribution. So indeed, if there is a member of a couple that has a greater amount than $500,000 and a member of a couple that has an amount that's lower than $500,000 the idea would be for that member that has less than $500,000 to stay beneath that threshold.
So, what's likely going to happen is that member would then divert 85% of their contributions to be the maximum to the member of the spouse that has a greater level than $500,000 preserving their benefit beneath, so they can access that more generous threshold and cap from 2014.
St Anne: David, we know that these announcements are only new, but are there any strategies at the moment that people can adopt to maximize their retirement?
Simon: Yeah look, it's a good question and we've only started to look at those strategies right now. Some of those strategies would be for people that are actually contributing $50,000 now that actually continue to do so and incur the actual access contribution tax. So, I think for those individuals that are on the highest marginal tax bracket at the moment, they will maintain that tax bracket if they were to exceed the $25,000 cap. The benefit there is that it then goes into a more concessionally tax environment. So, there is still a viability there. It's certainly less than what would be before the budget announcement.
Obviously, investors need to be very careful they don't exceed both there before-tax contribution and after-tax because the penalties are then significant and up to 93%. Other strategies that we're starting to look at is to some clients that have that risk appetite to actually take on more risky assets, hoping that over the long term that will fill some of the void though having less money contributed into superannuation.
Another strategy would be to make after-tax contributions into superannuation rather than relying on that before tax which indeed has its own threshold. And finally looking at non-superannuation by strategies such as investment in shares or property could be considered as other alternatives.
St Anne: David, now, we know that June 30th is on the horizon, are there any pre-tax strategies that people can adopt?
Simon: Look, certainly for those individuals that are over 50 they are at a limited time where they can still access that $50,000 contribution, so I certainly encourage them to utilize that benefit whilst it’s still here. There are a series of other benefits that individuals can review that are non-superannuation based. Some of them being the prepayment of private health insurance, certainly for individuals that are earning certainly above the average, they could actually loose their 30% rebate. So the idea is to prepay the private health insurance; indeed other aspects such as bringing forward medical expenses, the government budget that's recently announced changes in the gap threshold, as well as the rebate to individuals and families, so it’s about bringing them forward and accessing those.
Other aspects such as ‘in-specie’ transfers of assets, such as shares that may be in an individual’s name into a more concessional environment to superannuation as an after-tax contribution, seeing as the market is relatively low by moving assets from one structure to the other will ensure they go into more concessionally tax environment with reduced capital gains tax impact. But certainly there are a variety of different strategies that individuals can explore, that certainly it does - does obviously come down to their own personal needs and objectives and overall investment timeframe and philosophy, and certainly risk profile. So, we encourage they receive quality financial advice.
St Anne: David, thanks so much for your insights today.
Simon: Okay. Thank you, Christine.