Changes to Super

Proposed Superannuation changes.

You may be aware that the government has proposed to make a number of changes to your superannuation and how it will be taxed. Please keep in mind:

1.       This is your money, you’re earned it and you pay tax on it.

2.       Your superannuation will replace the age pension,

Age Pension

The proposed changes set out in the 2014 Federal Budget are to increase the age pension age. If you were born in 1966 or later you will not be eligible to receive the age pension until you are age 70.

Here are the core changes which will affect most people in the 2016 May Budget:

  • $1.6 million cap on the total amount of super that can be transferred into a tax-free retirement account.
  • Reducing the annual cap on concessional contributions to $25,000 and allowing catch up contributions of unused caps over 5 years for balances of $500,000 or less.
  • A $500,000 lifetime cap will to be applied to after-tax concessions on super to reduce the capacity for super to be used for wealth accumulation effective immediately and backdated to 2007.
  • Increase in super contributions tax to 30% on income above a threshold of salary of $250,000 per annum.
  • Permit personal deductions for contributions up to $25,000 a year for anyone under 75 which will help self-employed and retirees continue to build their retirement savings.

How these changes will affect you.

For most people these changes will affect the amount of money you will be able to accumulate in your superannuation fund. The amount of money you accumulate will affect the quality of life you will have in retirement.

If you were born in 1966 or after you will not be eligible for the age pension until age 70, as such you will need to relay on your superannuation if you wish to retire at age 60.

1.       The cap of $1.6 million in tax free pension will not affect most people. For a couple the combined total is $3.2 million. This is more than generous and would provide a great retirement for the vast majority of people. Any remaining funds would be left in a low tax environment of 15%.

2.       Reducing the concessional cap to $25,000 is where the problems start. The facts are that most people do not start saving seriously for retirement until there late forties or early fifties. This is no big surprise, before this people are raising a family and paying of a home, any spare cash goes pretty quickly. This cap will limit the over fifties from boosting they superannuation once the nest is empty.

3.       Limiting the lifetime non concessional cap to $500,000, when coupled with the reduction in the concessional cap again workers planning for retirement are limited on how much money they can get into superannuation at a time when it will be needed. Typically this money would come from the sale of a business or other investments such as investment properties or shares.  It does not make sense to put these investments inside of super to early just in case you need the money.

4.       Increasing the tax on superannuation for salary earners over $250,000 to 30% will not have a big impact across broader Australia. It is currently $300,000 before you receive this increase in tax, I suspect that this drop will catch a few more in the net and is simply attacking the richer people.

5.       Allowing personal contribution of $25,000 for people up to age 75, who wants to be working or needing a tax deduction at age 75? It does however clearly show that the government intends for us to all work longer.

Summary

When looking at retirement for Australians, what is clear is that the government is working hard to ensure that you work longer. Making it harder to get money into superannuation and raising the age pension age.  Based on the average wage if you start working at age 20 and salary sacrifice $25,000 per year into superannuation you will have the $1.6 million tax free pension at age 60.

However this is not a practical solution given the high cost of living in Australia, in our young years we raise families and buy homes, in our later years we build a nest egg to retire on so we can travel and relax and watch our families grow.

If these changes are introduced we will all need to review how we are going fund our retirement, the young need to ensure that they have a solid saving plan in place and get it started now. The rest of us need to take more interest in our superannuation and speak to a financial planner now.

The cost of not acting, is working until the age of 70.