Australian Economy

Well the 2016 Budget has been delivered, so what should we be doing regarding the changes to super?

There are a number of big changes regarding contributions to super, but in short the Government is making it harder to get larger amounts of money into super, thereby making it harder for retirees to take advantage of the tax free status of a Super Pension (known as an Allocated Pension).

Firstly, they have reduced the amount you can contribute into super for either a tax deduction or tax relief via salary sacrifice and employer contributions down to $25,000 p.a.  This comes into effect 1July 2017.

Secondly, they have reduced the amount of after tax funds you can contribute to super.  Until now you could contribute up to $180,000 p.a. and even pay 3 years in advance, i.e. pay $540,000 as a lump sum, and continue to do this up to age 74 if you were working.  A few years ago they even let you contribute up to $1,000,000. So that’s all behind us now, and from 3 May 2016 the maximum you can contribute is $500,000 over your life time.  The buggers are even going to count all contributions you have made since 1 July 2007.

Furthermore the most you can transfer to a tax free Super Pension is $1,600,000. This is aimed again to limit what people have done in the past to take advantage of the generous tax free status of the strategy.

So in plain English what does this mean for the average Australian?  In short you need to start early, and regularly put money into super.  No longer will people be able quickly pay off their  mortgage , then later in life when that’s paid off , start to top up super to catch up , and possibly tipping in large amounts from sale of assets or inheritances . Now it’s all changed.

What to do now?

Start Early!

The magic of compound interest means that contributions made in your 20s are 8-10 times more powerful than making the same contributions in your 50s and 60s. As an example if you start salary sacrificing $96 per week at age 25 (which will cost you much less due to the tax advantage of salary sacrifice) and stop at age 35, then you would have approximately an extra $787,000 in super at retirement. Whereas if the same person delays contributing to super until age 55 to 65, with the same salary sacrifice contributions, they would only have approximately $83,000 extra, a staggering $704,000 less.

Contribute smaller amounts but often

Simply put if you make modest salary sacrifice contributions early and not stop, you could be even better off than if you make larger contributions later on. It’s not rocket science, you need to go with a little less while you work, so when you retire you will have more.

Other Strategies

• Make sure you include your spouse in super planning as remember you can have 2 times $1,600,000 in tax free super pensions, i.e. $3,200,000. These would produce an income of $192,000 p.a. tax free income in retirement if we assume a 6% investment return.
• Take advantage of the tax effectiveness of a Transition to Retirement Strategy (in short available to people 56 and older) allowing them to pay less tax and retire with more in super.
• If you are self-employed you may be eligible to take advantage of the Small Business CGT Retirement Exemption rule. This is where you can sell your business, and use the proceeds to offset any Capital Gains Tax, allowing you to contribute up to $1,355,000 to super. This is in addition to the life time $500,000 cap.
• Review your investment strategy to ensure your investment is not just in a default fund. Make sure you have a Financial Planner actually guiding you, who does not work for a bank or a union super fund. That way your best interests are put before the bank’s or the union’s interests.

In closing there are many more strategies you can use to maximise your wealth; superannuation is just one of them, and in this article that’s all I’m focusing on. But in the real world it’s a great time to sit down and review what you’re doing both inside and outside super. After all, what most people want is a strategy to build wealth and minimise tax, while ensuring their family will be ok in the future.

Still have some questions?

If you want to discuss your impact of the budget and your financial future with one of our advisors. Call us to arrange an appointment on 02 9328 0876.

Article by Bill Bracey | Principal & Senior Financial Planner

General Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. Please seek personal financial advice prior to acting on this information.