Superannuation changes that take effect on July 1 could have a huge impact on workers, particularly the wealthy, and many could end up paying more tax.
The news is not all bad, and there are opportunities to make smart financial decisions that will put you in the driver’s seat for retirement.
Both concessional and non-concessional super contribution options will be affected by the changes. Depending on your age, the present rules allow you to contribute up to $35,000 to super, which will be reduced to $25,000 if you are claiming a tax deduction.
This will make it harder to boost retirement savings late in your working life via concessional super contributions. It also will affect you if you are now maximising your limit and need to make adjustments to avoid breaching the new limit.
If you are not claiming a tax deduction, you can now contribute up to $180,000 a year. This will be cut to $100,000 from next year, and depending on your total super balance, it may be cut to zero.
While a $100,000 annual limit may still seem generous, it could seriously affect your ability to contribute sufficient capital to super throughout your working life.
For instance, if you receive an inheritance or sell an investment property and want to contribute the equity into super, you will have a reduced capacity to do so — particularly if you are approaching 65 and in the latter stages of your working life.
Arguably the biggest impact of the changes will be a limit on how much an individual can hold within a pension account. This limit will be initially $1.6 million and will be indexed over time.
If your pension balance is above this amount, you will need to transfer the excess component back into your accumulation account or withdraw it from super by July 1.
When it comes to contributions, if your total super balance is $1.6m or above, you will no longer be able to make personal (non-concessional) contributions.
This is a big change as contributions are now limited at $540,000 using bring-forward provisions.
From July 1, this will no longer be possible, resulting in wealthy Australians being locked out of making additional non-concessional contributions where earnings are taxed at a maximum of 15 per cent, compared with up to 49 per cent outside super.
A popular strategy in recent years has been to convert super into a transition-to-retirement pension, particularly from 60, when pension payments are tax free. From July 1, the tax concessions within the super pension account will be removed, incurring a 15 per cent tax on the income, previously tax free.
In some instances, this may result in the transition-to-retirement pension strategy no longer being viable, while in others this may remain appropriate, although it will not be quite as tax-effective as present arrangements.
Some Australians will benefit from the new changes, including those contributing into a spouse’s super fund and employees wanting to make personal concessional contributions.
Everyone’s circumstances are different, so people determined to fund their own retirement should speak to an adviser before amending plans.
Start retirement planning early as making the right decisions now will more than likely have long-term benefits.
Nick Andrews is a financial adviser with RSM Financial Services Australia.