17 December 2016
The year may be winding down, but for people approaching retirement and wanting to protect their financial future, there will be some hard decisions to be made over the next few months.
After a year of changes and uncertainty for super policy, the first point is that for most people with middle incomes, super is still the best option to save for their retirement.
The new limit of $1.6 million on the amount that can be transferred into the tax-free retirement “bucket” from July 1 next year will still be high enough for many ordinary people.
In fact, the challenge for many people now, particularly in lower age groups, will be to get to the $1.6m in the first place. Here’s why:
- The lower concessional (pre-tax) super contribution levels, which will come down to $25,000 a year from July 1 (including SG payments) and the tightening up of non-concessional (post-tax) contributions, down to $100,000 a year, will make it increasingly hard for many people to get to this level over time.
- Where they can, people need to take advantage of the situation that will prevail for the next few months, which allows concessional super contributions to be made up to $35,000 a year for people over
- More significant will be the last chance between now and June 30 for people to contribute $180,000 a year, or a potential $540,000 over three years, out of their post-tax
These are still basically good ideas, but for people with super balances above or approaching $1.6m, there are more complex decisions to be made.
Any savings older investors have in a super fund above $1.6m, at the time of retirement, will be taxed at 15 per cent from the first dollar of earnings.
While this sounds lower than the lowest marginal tax rate, which starts at 19 per cent, at the moment the first $18,200 of an individual’s earnings are tax- free.
For people over 65 there is the potential to effectively improve their tax situation with the use of the senior and pension tax offset.
This offset scheme has specific rules and limitations, but for people making the decision on whether to put more into their super above the $1.6m level this year, it is worth getting advice on what their long-term tax position will be on their earnings outside of super.
Though the super changes kick in on July 1 next year, a range of cutbacks to pension access will be introduced much earlier — they commence on January 1.
Those who are still working and have available cash outside super should think about taking advantage of the higher contribution caps this financial year anyway, on the basis that the funds can be taken out later.
But the real issue for some people will be where they may have to sell shares and other assets that incur capital gains tax to put into super between now and June 30.
With the new $1.6m “transfer balance cap”, these people will need to work out whether the reality of a capital-gains tax bill for this financial year is worth the amount of tax they may save over the longer term getting their retirement money into an environment where they could be paying up to 15 per cent tax on earnings.
There are many issues individuals will need to be aware of in the transition to the new regime from July 1.
Those with more than $1.6m in super who are already in pension mode should get some advice on how they will be affected as, from July 1, their fund will be (actuarially) split into two buckets.
More accurately, any assets over $1.6m as of July 1 (indexed annually in increments of $100,000) will be moved back into accumulation mode.
The $1.6m is the limit that can be transferred into super retirement mode over a person’s lifetime from July 1.
Once in the retirement “bucket”, the amount can go up or down with the market or as a result of withdrawals.
There are many bells and whistles to the changes, with each person’s situation being different. Colonial First State’s First Tech super reform update points out that there is potential for individuals to have a different transfer balance cap over time because of the indexation arrangements.
For those with super funds above $1.6m which are currently in retirement phase, the government has allowed some transitional capital gains tax relief on the amount over $1.6m which has to be moved from the retirement phase back into the accumulation phase.
Under the changes, the government has allowed super fund trustees a one- off chance to elect to reset the cost base of their assets to their current market value.
So if the super fund has bought shares in XYZ Corporation for $1 each some years ago, which have a market value of $5 as of June 30, the trustee can elect to reset the cost base to $5 when the assets are moved back into the 15 per cent tax accumulation mode on July 1.
The CGT relief only applies to assets held between November 9 and June 30.
People with self-managed super funds in this situation should get advice on how the CGT election can work for them.
In short, for most ordinary people, super is still the best way to save for their retirement and they should think about taking advantages of higher contribution opportunities before June 30.
But people with super balances above $1.6m should get advice on the best contribution and investment strategies going forward.
It’s worth thinking about it now as financial advisers and accountants will be under increasing time pressure to answer questions about the changes as the June 30 approaches.