As of July 1, 2017, some major changes to superannuation will come into effect. These changes will impact how, and how much, you can contribute to super over your lifetime. We break down the key changes and tell what you need to do before June 30th.
The superannuation changes coming into effect on July 1, 2017 are the most significant in a decade. They will affect us all in different ways, depending on our personal circumstances and plans.
What are the super changes in 2017?
The key superannuation changes are:
- The concessional contributions limit for everyone has been reduced from $35,000 to $25,000 per annum.
- These after-tax contributions are now restricted to those with less than $1.6m in superannuation.
- Amounts held in pension accounts will be limited to $1.6m.
- Investment earnings of ‘transition to retirement’ (TTR) pensions are to be taxed at 15%, the same as super accumulation accounts.
Three things to do before June 20, 2017
1. Maximise your concessional contributions Concessional contributions are currently at a maximum of $35,000 for individuals who were 49 or older on 30 June 2016. For everyone else, the limit is $30,000. An opportunity to make concessional contributions of up to $30,000 or $35,000 is available up until 30 June 2017. From 1 July 2017, the cap will be $25,000.
2. Maximise your non-concessional (after tax) contributions The cap for 2016-17 is $180,000. For people under age 65 (at July 1, 2016), they can bring forward a further two years contributions, totalling up to $540,000, before June 30, 2017.
From July 1, 2017, the non-concessional contribution cap will reduce to $100,000, with a maximum of $300,000 being able to be contributed under the three-year bring-forward rule. As well, the ability to make non-concessional contributions will be limited to those with less than $1.6m in superannuation.
3. Review your pension before June 30, 2017 The $1.6m limit on the amount held in the retirement (pension) phase is retrospective. That is, it applies to existing pensions as well as those established in future.
This means that any excess over $1.6m will need to be retained in an accumulation account, where investment earnings are taxed at 15%.
Alternatively, all or a part of the excess may be withdrawn from super and invested in the individual’s own name, with earnings taxed at the marginal tax rate, or through another structure, such as a family trust or private company.
For those with self-managed superannuation funds, your adviser should be reviewing the investments that are supporting pension liabilities and looking to take advantage of the capital gains tax relief available where pension balances are being rolled back to an accumulation account.
Super is still a great investment
Despite these changes, for most Australians, superannuation remains the best wealth accumulation structure from a tax perspective. On top of the income tax benefits available on contributions, superannuation in the accumulation phase pays maximum tax of 15% on investment income and no tax when a super fund is paying a pension to its members.
How to plan for your super future in retirement
Given the reduction in the amounts that may be contributed, it may be smart to start accumulating wealth for retirement sooner rather than later.
The Association of Superannuation Funds of Australia (ASFA) estimates the costs of a modest and a comfortable retirement: For a couple, the budget for a comfortable retirement is currently just shy of $60,000 per annum, and they will need $640,000 in super to support this lifestyle, assuming they are debt-free and are entitled to a part age pension. Based on this estimate, the current contributions caps are more than adequate for a couple to accumulate sufficient superannuation savings over their working life to support a comfortable lifestyle in retirement.
Clearly, those looking to build their wealth and fund a more affluent retirement lifestyle may no longer have access to the same degree of tax concessions as previously available. In which case, we would suggest an examination of alternative non-super wealth accumulation strategies might be appropriate.
What’s the biggest takeaway from these changes?
With forward planning and appropriate advice, most Australians will still be able to build an adequate retirement nest egg within the contribution cap constraints that apply from July 1, 2017. However, it’s important to get financial advice to make sure your superannuation savings strategies are appropriate and on target to fund the retirement you desire.
Please talk to us anytime about your super and retirement strategy. Call us on (02) 8268 2900 for an obligation-free chat.