(03) 9020 2905PORTFOLIO POINT: Super contribution and pension strategies are going to need constant tinkering to stay one step ahead of Rudd Government legislation changes.
Considered research continues to highlight the difficulties being encountered by Australians trying to work within the new contribution rules to provide for their retirement following the Rudd Government’s halving of the concessional limits.
The reduced contribution limits have effectively reintroduced the worst aspects of the old reasonable benefit limit (RBLs) system. The 2009 difference is that instead of the problem being getting money out of super effectively, the difficulty will be getting enough money into super in the first place.
If this continues, the aims of Simpler Super will soon be close to being dead and buried. It really does have the potential to turn a good portion of the population off super as a retirement savings strategy. It’s becoming far too complex again (as the next few years, below, show).
If the rules aren’t changed, Australians will have to start to beef up their super far, far earlier – in their early 40s, at a time when they should arguably be using spare savings to pay down their mortgages. (Or invest more outside of superannuation where it will remain taxable income, but at least it will be accessible.)
As I discussed on August 12, those who are currently contributing or salary sacrificing near the top end of the old rates ($100,000 for the over 50s and $50,000 for those under 50) need to see their adviser/accountant soon. If you continue paying higher contributions for too much longer, you’ll quickly hit the penalty tax zone.
But there are a few issues to look at in regards to the impact of the lower concessional limits on transition to retirement strategies (TTRs), particularly those that include a salary sacrifice component. Further, there’s the temporary reduction in minimum pension repayments and how they fit into the plan.
In a Macquarie Bank magazine Forward Thinking (sent to financial advisers), the bank’s researchers have pulled together an interesting, and by no means outrageous, example that highlights how over the course of three financial years (2008-09 through to 2010-11), “Alison” is going to have to make three, possibly four, significant changes to her super strategy, just to make sure she is doesn’t lose tens of thousands of dollars in tax, largely because of the changes to concessional contributions. But there’s also the hand grenade thrown in by the halving of the minimum pension requirement.
Alison is a 55-year-old (at July 1, 2008), at which time she has $600,000 in super. She has a salary package, including super, of $150,000 and has spending requirements of $88,400 a year (or $1700 a week).
FY 2008-09
Under a standard salary sacrifice agreement, Alison would contribute her 9% SG contribution, and salary sacrifice what was above her spending needs (that is, above $88,400 a year). She would therefore put a total of $22,821 into super.
This is not the best outcome for Alison. As Alison is 55 and able to access a transition to retirement (TTR) pension, she could still get her income requirements, but with a far better result for her super. If she had salary sacrificed her full limit for the 2008-09 FY, she would have drawn a pension of $50,198 for the year and salary sacrificed $100,000 of her salary (which would lose just 15% for those contributions).
This would have been a far better situation for Alison to have been in. On top of that, Alison’s fund becomes a pension fund, which would mean no further tax on income or gains for the pension portion of her fund.
Net result? While Alison would still have received the same amount in her hand, she would have ended up with about $20,000 more in her super fund than a straight SS agreement.
These are under the rules prior to the May Federal Budget.
FY 2009-10
Enter the major change introduced by the Rudd Government – the reduction in the $100,000 concessional contribution limit to $50,000 for those aged over 55.
Alison now cannot put more than $50,000 into super, so she is going to have to take $100,000 in salary. In order to match her spending requirements, she’s going to have to take a $16,973 pension. This pension, approximately 2.5% of her fund, is only possible because of the halving of the usual 4% minimum pension requirement that has been extended to the 2009-10 financial year.
“The lower minimum therefore partially offsets the negative implications of the reduced CC cap,” Macquarie’s research says.
Had it not been for the reduction in the minimum pension, Alison would have had two options. The first would be to have commuted a portion of her pension back to accumulation fund, or to contribute some of her excess income back in as a non-concessional contribution.
The cost, as compared to the previous rules, will be thousands of dollars a year.
FY 2010-11
Assuming the Rudd Government doesn’t make further changes to the rules – which is an enormous if, considering the reviews and committees looking at super at the moment – we can look at what the rules are currently set to be next financial year.
Macquarie has assumed that the minimum pension requirement is raised back to 4%.
The main issue for Alison now is that she’s going to have a significant excess income problem, as she can still only contribute $50,000 to super for SG and salary sacrifice contributions. But, if she takes the 4% pension payment, she’s also going to have to take more pension than she requires.
Alison has two options, with option 1 being ahead by about $1000.
Option 1: maintain the TTR pension, draw minimum pension payments and recontribute excess cashflow as non-concessional contributions.
Option 2: Commute enough of the TTR pension fund back to accumulation so that Alison only has to take the $88,400 in income that she requires.
Still, a major readjustment needed from the previous year.
FY 2011-12
Perhaps a breather. Not covered by Macquarie. And the fact is we don’t really know. There’s no big changes that I’m aware of, under current rules.
FY 2012-13
There are going to be more problems for Alison, who is now 59. The temporary higher limit for the over 50s, $50,000, will be reduced to $25,000. Significant further adjustment required.
But, hopefully by then, someone in power will have come to their senses.
*****
From this point, Macquarie’s research becomes particularly technical (possibly something to come back to in a future column).
But they conclude: “A SS/TTR strategy may continue to add value for many clients despite the Budget changes which have reduced the relative attractiveness of the strategy.”
It is above the average, sure, but Alison’s situation is only one or two ballparks (or standard deviations) from it. Juggling the balls that make up maximising your superannuation over the next couple of years is going to take some adjustments, many of which will require complex calculations.
Bruce Brammall is the author of Debt Man Walking and director of Castellan Financial Consulting.