(03) 9020 2905On the super contributions front, there’s a clock ticking. It’s attached to a bomb and if you don’t act quickly, it has the potential to cost you thousands of dollars in tax.
For others, particularly those aged roughly 40-55, a completely new approach for super is required. And failing to grasp this reasonably early could cost a considerable amount of retirement savings.
With the dust now settling on the Rudd Government’s slashing of concessional limits for super contributions, the inequities of the new system are becoming clearer. Putting the unfairness to one side, people need to adapt, and do so before it costs them an arm and a leg.
From July 1, the Rudd Government halved the limits for concessional contributions – largely superannuation guarantee and salary sacrifice payments – for all Australians. This meant that those aged over 50 can now only put a maximum of $50,000 of their pre-tax earnings into super. And everyone else can only put in $25,000 a year.
This is unfair on two fronts. Prior to June 30, 2007, Australians over 50 had an age-based contribution limit of a little more than $105,000, which was indexed for inflation, so would now have been about $112,000 to $113,000. This got cut to $100,000 for a five-year period that was to run between the 2007-08 and 2011-12 financial years.
This was in recognition of the ability and need for people to put money into super in their final working years, when the mortgage is likely to have been paid off and the kids are off their hands.
Gone. A person aged 50 in 2007 who was going to work until 65 has gone from being able to put in approximately $1.6m ($105,000 times 15 years, although the now defunct reasonable benefit limits would impacted on that) to about $1m (for the Costello reforms, which would have allowed $100,000 times five years, plus $50,000 times 10 years) to now about $600,000 under the Rudd/Swan latest tinkering.
This is made up of $200,000 that they could have put in for the 2008 and 2009 financial years, followed by three years at $50,000, followed by ten years at $25,000 a year.
Hey, didn’t the reasonable benefit limit get removed?
Tick, tick, tick. Right, back to the time bomb.
Those people who had set their superannuation strategies prior to the Budget changes being announced to take advantage of the $100,000 or $50,000 age-based limits need to review those strategies. And they need to review them about now, because as each month passes, the closer to the limit you’ll get.
The over-50s
To show by example, let’s take a 53-year-old employee earning $150,000 a year.
Their SG employer contributions are approximately $13,500 a year, leaving that person up to approximately $86,500 that they could salary sacrifice into super and still stay below the $100,000 concessional contributions limit. With no mortgage, this might be possible.
However, if this person is salary sacrificing any more than $36,500, they are now going to be over a limit and adjustments need to be made now.
The timebomb aspect of it is this: it’s August. Your employer is committed to paying that $13,500. If you were still salary sacrificing a further $86,500 of your salary, by the end of September, you will have already put away a further $21,625 (or one-quarter of $86,500).
That makes a total of $35,125 ($13,500 in SG over the whole year and $21,625 from you to the end of September) that will be definitely be contributed to your account for this financial year of your new $50,000 limit. You only have a maximum of $14,875 that can continue to be contributed. If you’re still contributing at the same pace in early December, you’ve probably entered into penalty tax zone, where contributions are taxed at 46.5%.
Anyone on track to contribute more than $50,000 this year needs to make an adjustment to their salary sacrificing arrangements, as well as all those who using transition to retirement pension schemes. See your pay office, accountant or adviser soon.
The under-50s
Probably the worst aspect of the changes is that those aged 45 or so – about the time people begin to focus on their super – have had their limits cut from $50,000 to $25,000.
To push the example above a little bit, let’s take a 47-year-old who is earning $200,000 a year. Their SG contributions from their super fund will be $18,000. That leaves them a maximum of $7000 that they could, tax-effectively, salary sacrifice into super.
Or someone earning $100,000. The $9000 going in via SG contributions could have a maximum of $16,000 added to it in the way of salary sacrificed contributions.
These, sadly, are the new rules.
And this is where a change of mindset is required. (Or perhaps a change in government attitude, or government itself.)
If the current rules stay in place – and you can’t plan on them not – then the days of backending your super contributions are gone.
This 47-year-old won’t get any of the higher $50,000 limit once they turn 50.
The fact is that people will have to start contributing earlier. This is not always feasible because of mortgage repayments, school fees, loan repayments, etc. But there is little choice.
And the more you earn, particularly those earning more than $150,000 a year, the more important it becomes to spread your tax burden over an extended period and start a salary sacrifice strategy earlier in life.
On current rules, a 45-year-old will be able to get NO MORE than $500,000 into super through concessional contributions through to age 65.
None of the recommendations in this article should be taken as personal investment or financial advice. In any investment program, your personal situation and needs should be taken into account. Please see your adviser/s before implementing any major changes to your investment program
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A special plea to new Minister for Superannuation, Chris Bowen: Please, spare us the rhetoric.
Bowen told a recent Investment and Financial Services Association conference that the industry shouldn’t be scared of the current reviews into superannuation. The reviews should be embraced, he said, as a chance to create “stable policy”.
“When … complete, I would like to be in a position where the reform process has been conducted so transparently and that everyone is clear on Government policy so that we will have a stable policy environment for several years to come,” he said.
“In other words, the reviews, and the Government’s response, will obviate the need for ad-hoc policy change so that governments of both political persuasions see no need to embark on further changes for several years,” Bowen said.
You mean short-sighted, ad-hoc policy changes like halving the concessional contribution limits from $100,000 to $50,000 and $50,000 to $25,000? Like cutting the government’s co-contribution from $1500 to $1000? While SMSF trustees and those trying to do their best to provide for their own retirements are still reeling from these latest changes – which had been in place for just TWO (subs note: please italicise, bold or cap ‘two’) years – spare us the “stable policy” line, Minister.
More so than almost any other aspect of government policy, superannuation policy has almost zero policy certainty. “Long-term” superannuation rules last approximately half a government in this country. Bizarre given that superannuation is supposed to be a lifetime investment. Super members are constantly forced to make short-term investment decisions (see above) as a result of government policy changes, as many were in June just gone because of the concessional contribution limit reductions.
We hope you mean it, Minister. The problem is, super members have heard it all before. One of the reasons Australians don’t have faith in superannuation is because governments have proven time and again that they simply can’t stop themselves tinkering. These most recent changes made by the Rudd Government prove beyond doubt that superannuation is as every bit as party political, as driven by dogma, as the most contentious of other political divides, such as how to fund private schools or hospitals.
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On a more positive note, a plaudit for Minister Bowen. It’s great to see self-managed super funds getting a look in and representation on one of the government’s committees.
Meg Heffron’s inclusion (see Sarah Danckert’s story last Wednesday here) on the super review panel will give Australia’s 400,000-odd super funds and 800,000 or so members a much needed voice in the future shape of the industry.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.