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SUMMARY: What’s the biggest super fund that can now be built? Around $9.3m … and here’s how that is done.
Want to build the biggest super fund possible?
Do you want to have a self-managed super fund that smashes the $1.6m transfer balance cap and keeps growing, with millions taxed at only 15%?
Thumb your nose at the government’s attempts to stop intergenerational wealth transfer via superannuation?
Here’s how to get to $9.3 million in today’s dollars. (Though your own efforts/skills could take it higher. See below.)
It won’t include any heroic assumptions. No stupidly high growth rates on investments (well, in my opinion, but I’m happy to argue on that).
It’s more, actually, about maximising the new, low, contribution limits.
But here’s the problem. Unless your surname is Packer, Lowy, Triguboff, Murdoch, Pratt, Gandel or Fox – or you fly somewhere near their rarified air space – this strategy might be beyond your reach.
Any strategy to maximise super is going to have to start with an understanding of the following:
- Non-concessional contributions are now limited to $100,000 a year.
- You are not able to make further NCCs to super once your total super balance has reached $1.6 million.
- After you’ve hit $1.6 million, you can only make concessional contributions, which are limited to $25,000, but are taxed at 15%.
So, to build the biggest ever super fund under these new restrictions, here is how we are going to start.
First, we’re going to kick it off at age 18 by using the three-year pull-forward rule to drop in $300,000.
(Which is why I was saying that only the likes of those kiddies who parents are at the top of the Rich Lists can do it.)
They put in another $300,000 when they turn 21. And abuse the three-year pull-forward rule again at age 24.
As far as NCCs go, and depending on some growth, that’s pretty much it, because they’ve also been making the maximum $25k a year in concessional contributions.
Note: Right about here, we have to add the major extra assumption being used. I’m using 4% as an after-tax, after-inflation, return on investment. I don’t think that’s heroic, but you might argue differently. This is to keep it in current dollars. It also means for the purpose of simplification, we’re not having to raise CC and NCC limits in line with inflation either.
So, before turning 27, they’ve hit around $1.38m in super, because of the 4% real investment returns. So, I’m going to allow one more $200,000 non-concessional contribution at age 27.
From there, the only contributions allowed are the $25,000 annual concessional contributions, up to the age of 65. (If you can meet the work test after that, you can continue with the $25k limit until you hit 75.)
The growth from there? Here are two tables. Table one shows you the first ten years, while NCCs and CCs, plus some growth, are taking the super beyond $1.6m.
Table 1: Growing to the first $1.6m.
Then we move into the phase where it is only concessional contributions, plus growth.
Table 2: Growth to age 65
You hit nearly $9.3 million when you turn 65. With a relative fortune taxed at only 15%.
Look, this is just a mathematical exercise. Literally only those with rich list parents are going to be able to do this.
The real point of this exercise is that the ONLY way to build mega-super funds of the future will be to maximise contributions as early as possible. Almost no-one can afford to make big NCCs in their 20s or 30s. Very few will do so in their 40s. Most NCCs happen in their 50s and 60s.
Building large super funds of the future will largely be done by maximising the $25,000 concessional contributions.
Using the above maths, but taking out all NCCs, you would reach 65 with a total super balance of around $3.08 million.
And if you maximise your CCs from day dot in the workforce, you will actually top out on $1.6m as a total super balance by age 52. If this is when most are likely to put NCCs into super … you will have already breached your limit.
Even bigger from here
Let’s hypothecate a little further.
Yes, it is possible to grow it even bigger than a $9.3m super fund.
To this point, we have not used any gearing. But gearing could play a major role, on two fronts.
The first is that if the SMSF trustees believe they can achieve higher overall rates of return with the use of borrowing (into property, or shares), then the ability to increase the pool here is only limited by returns.
The second is more fanciful, but considers that it is still technically possible for the likes of a Packer or a Triguboff to make a loan of, say, $100 million to their SMSF. If an asset price doubles, then the loan is repaid, then the fund is now worth $100 million, give or take a bunch of other factors too complex to go into right now.
The rules around related-party lending have changed in recent years and those loans now need to be made, roughly, on commercial terms.
But the larger a super fund became, the more a wealthy family could potentially lend to their SMSF and the more wealth that could be trapped in there.
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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au . Bruce’s new book, Mortgages Made Easy, is available now.