Advertisement

Beware of getting caught in the super stampede

Scott Morrison fired the super starting gun.

Scott Morrison fired the super starting gun. Photo:Getty

Treasurer Scott Morrison fired the starting gun for what could become a super stampede, when he announced last week the scrapping of his plan for a $500,000 lifetime cap on non-concessional or after-tax contributions to superannuation.

But think twice and get some good advice before you join in. If you don’t, what you thought was a gold rush could end in a trail of tears.

Prior to budget night this year, when Mr Morrison announced his controversial changes, super was the investment of choice for the wealthy and aspirational.

The Goldilocks syndrome

Super was Fairyland

Super was Fairyland prior to changes. Photo: Getty

The name of the game was getting as much cash in super as you could. Then you could make the most of the Goldilocks world where, once you retired at 60, you never paid tax again, no matter how big your super pile was.

That, of course, was too good to last and Mr Morrison’s $500,000 cap was the first shot in the battle to bring super back from Fairyland. He lost a battle but appears to have won the war, with a less stringent restriction of non-concessional caps.

From next July, non-concessional contributions will be limited to $100,000 a year or $300,000 every three years. And the right to contribute stops if your fund hits $1.6 million.

Until then, it’s $180,000 per year or $540,000 every three years, with no upper fund limit.

That means a gate is open that the wealthy and the bold will try to bolt through before next July. The aim will be either to make a bigger contribution than the new rules will allow, boost their fund above $1.6 million, or both.

The open door will mean nothing to most people who can’t get near either of those limits. But it could persuade others to take unwise risks by borrowing to boost their super balance.

We’ve been here before

When then-treasurer Peter Costello allowed one-off contributions of up to $1 million in the year to June 2007, members of retail, corporate and industry funds turned mad for super.

They boosted their non-concessional and salary sacrifice contributions to record levels, as official figures show. Non-concessional contributions jumped 300 per cent.

screen-shot-2016-09-19-at-2-51-12-pm

Over in the self-managed super fund world things went totally bonkers, with member contributions up 430 per cent to levels never seen again.

These rushes of blood to the head brought a lot of people undone. Some borrowed big money which they dumped into super.

When the global financial crisis hit a few months later they lost their houses and other assets.

“A lot of people put in a million and two or three years later after the GFC their funds were worth $700,000. It was very common,” says Ross Stephens, a superannuation advisor with KPMG.

John Randall, a superannuation partner with Deloitte, says “there were lots who borrowed. Some transferred assets into super and had to pay capital gains tax”.

“Then the slump hit and they ended up in a very hard condition having paid capital gains tax and the fund losing a lot of value,” he said.

So be careful

Markets are volatile at the moment with Brexit, negative bond rates and the US likely to increase interest rates in coming months. We may not see another GFC, but super fund values could easily be hit again.

Mr Randall said people planning to downsize their home to build super balances need to be careful.

The study found women are often trying to catch up on contributions later in life.

Be careful with your money.

“If you borrow temporarily to build super balances and plan to pay down the debt by selling the house after June 30, you could have a problem (if markets fall).”

The key to not losing your head is planning.

“People need to plan based on what they would have done prior to the changes. If you are making plans based only on tax considerations you need to be very careful as there could be unintended consequences,” said David Simon, principal of Integral Private Wealth.

“Only take advantage of the obvious opportunity if the decision comes at the back end of a discussion with advisors about your financial position and needs.”

Stay informed, daily
A FREE subscription to The New Daily arrives every morning and evening.
The New Daily is a trusted source of national news and information and is provided free for all Australians. Read our editorial charter
Copyright © 2024 The New Daily.
All rights reserved.