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Nobody predicted the scale of last week’s changes to superannuation. It was a big-bang, 8.7-on-the-Richter-scale, once-in-a-decade, event.
While almost all of the changes had been floated, that all of them would be done at once … mindblowing.
The wealthy will have gritted teeth. Those with seriously large superannuation funds will get whacked. But will it change their vote? Given Labor will probably support most of the changes? Probably not.
They’ve known they’ve had it too good for too long. As time wore on, it became more and more obvious that Peter Costello’s 2007 changes were too generous.
But let’s ignore their Jabba The Hut like moans and groans. They’ll get over it.
The transition-to-retirement strategy has been declared a “how did we let this happen tax rort?”. There’s no grandfathering. Those pension funds will begin to pay tax from mid next year. But the pension payments received by the members will continue to be tax free.
Some of the superannuation changes will work well for us youngsters.
From 1 July 2017, the concessional contribution limit will be reduced to $25,000 for everyone. (This is predominantly your 9.5 per cent superannuation guarantee, any salary sacrifice, or, if you’re self-employed, deductible contributions.)
While the reduction is bad news, there are two things to note. The first is that the under-50s will continue to have a $30,000 limit for FY2016 and FY2017.
If your total contributions have been around $20-25,000 in recent years, you might want to push this up to $30,000 for this financial year and next. After that, you’ll be limited to $25,000 anyway. The short-term cash-flow pain over the next 14 months will be worth it long term.
The second is that we’re getting the ability to make catch-up contributions over rolling five-year periods.
If you’re only putting in $10,000 a year for four years, but have a big pay rise (or pay off your mortgage, or sell an investment property), for example, you will be able to put in up to $85,000 in the fifth year. This will be four lots of $15,000 (the catch-up), plus the fifth year’s contributions of $25,000.
For Generation Xers, this is an important change. Through our 40s, in particular, we’re usually battling monster mortgages and childrens’ education expenses. Spare cash flow can be minimal. But this will give some flexibility to make up for either low-income, or high-expense, years.
It’s certainly better than the current use-it-or-lose-it rules.
The change will probably most benefit the self-employed. In bad years, they often won’t put anything into super, because cash flow doesn’t allow it. Being able to catch up will change the game.
But the lower limit increases the importance of contributing more to super earlier in life. Start making extra super contributions from your late 30s.
Because, by the time the kids are out of school and the mortgage is paid down in your 50s, your income will have risen and you’ll want to contribute extra to super, but will be limited to just $25,000.
The 10 per cent has also been abolished. For those who are partly self-employed and partly an employee, this is an important one.
If you have previously earned more than 10 per cent of your income as an employee, you could only make extra contributions via your employer. And if your employer didn’t allow salary sacrifice, you were … um … stuffed.
While this rule doesn’t come in until mid 2017, it will be a big change for our generation, who are less likely to have a full-time job and more likely to have flexible, custom-built, incomes.
There are other good rule changes that will help those with lower incomes.
The government has reversed its decision to axe the low-income superannuation contribution for those earning less than $37,000 a year (at up to $500). And the rebate of $540 for contributing to a low-earning spouse has also had the maximum salary increased from $10,800 to $37,000.
The top-of-the-tree change – to restrict pension funds to a cap of $1.6 million – might seem like growing your super is pointless.
Not the case. If you grow your super into a massive pot and can’t put it all into pension, it will continue to sit in the accumulation phase, being taxed at a maximum of 15 per cent, versus up to the maximum tax rate of 47 per cent outside super.
Massive changes! I’ll cover more in the coming weeks.
Bruce Brammall is the author of Mortgages Made Easy and managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au.