The coming of the new financial year on July 1 will be accompanied by a major revamp of the superannuation system legislated last year by the Turnbull government. It’s something you need to start thinking about beforehand.
While the changes generated much political heat, which saw Treasurer Scott Morrison back down on some of his more controversial planned measures, the system is still in for a big overhaul.
Some Australians believe the changes will not affect them because only high-income earners and high balances have been targeted by the reforms.
But adviser and principal of Integral Private Wealth, David Simon, said that was not necessarily true.
“The overarching message of the changes is urgency,” he told The New Daily.
“In the past people could wait almost till they retired to put money into super. But now it is necessary to plan urgently and start early.”
The need for urgency is based on two factors. Firstly, the changes to the super system build in lower caps for both pre- and post-tax contributions. From July, pre-tax contribution limits will come down from $30,000 or $35,000 for those above 49, to a maximum of $25,000.
Non-concessional, or after-tax, contributions will come down from $180,000 a year to $100,000 a year and contributions will be banned for anyone with $1.6 million in their fund. So if you have a big fund or for some reason have cash at your disposal, you might want to take advantage of the larger caps and contribute before June 30.
Start saving earlier
Secondly, Mr Simon said the new system meant that savings will have to be done over a lifetime rather than waiting until you can afford larger contributions in later years.
“Be sensible and strategic and start to build up a balance now,” he said.
This could mean starting to salary sacrifice early to build up a balance slowly. But one change that will give more flexibility over contributions are new changes to salary sacrifice and concessional caps.
Concessional contributions above the 9.5 per cent super guarantee will be able to be made by anyone, whether through salary sacrifice or not. And those caps, of $25,000, will be able to be rolled up for five years if unused, as long as you have less than $500,000 in your fund.
That could give flexibility to those seeking to take time out of the workforce or cut back hours to boost contributions and cut their tax bill in the year before they take time out. Then they can take time out and, if possible, boost contributions again one they return to work.
Be aware of changes to ‘Transition to Retirement’ pensions
Another area to look at is transition to retirement pensions. People can take these once they reach preservation age (between 56 and 60 depending on when you were born).
They take some tax-free super income and contribute as much of their employment income as they can back into super at a concessional tax rate of 15 per cent. That is generally lower than their personal tax rates, giving them a tax advantage.
The new system will tax earnings on transition to retirement pensions in the super fund at 15 per cent. As a result the system may no longer deliver significant advantages.
“Unless you need the pension income, or can retire and convert it to a normal account-based pension, it may be in your interests to roll your TtR income stream back to super,” said Colin Lewis, strategic advice chief at financial group Perpetual Private.
Plan with your spouse
The new system will also boost eligibility for super contributions to a low-income partner.
Currently, if one partner earns less than $10,800 each year and the other partner makes an after-tax contribution into their super, they receive a tax offset up to 18 per cent for contributions up to $3000 a year.
From July 1, that income limit will rise to $37,000.
REST Industry Super said in a statement: “This change offers a fantastic opportunity to boost your spouse’s super and help them build a brighter future for your family.”
Up to $500 for low-paid workers
The Abbott government had planned to scrap a Labor measure that gave low-income workers earning $37,000 or less offset payments of up to $500 a year into their super fund.
Under public pressure, the Turnbull government backflipped, to the benefit of around 3.1 million low-income earners. From July 1, Labor’s low income super contribution (LISC) will be replaced by the Coalition’s low income super tax offset (LISTO).
REST Industry Super has described this as “an important budget measure to help low income earners boost their super”.
The name may have changed, but the details remain the same. Workers earning less than $37,000 a year can expect a refund of 15 per cent of the tax they pay on the mandatory contributions made by their employer – worth up to $500 a year.