PORTFOLIO POINT: Post-Budget super strategies to combat the latest attack on your retirement nest-egg.
I was seething. As should you have been.
Sure, I was sitting on a holiday in Bali, having to read the Federal Budget by mobile phone via a sometimes dodgy WiFi connection, but it didn’t temper the anger. A friend sitting beside me said he saw froth in one corner of my mouth as I muttered under my breath.
I’m talking about the Federal Government’s deferral of the start date of the 50-50-500 rule in last week’s Budget. That two-year delay is going to cost many of you tens of thousands of dollars to your retirement savings. That comes not just in salary sacrifice-style tax savings, but the growth on those super sums over a period of 10-20 years.
That would have been bad enough. Especially when Super Minister Bill Shorten’s press secretary specifically denied the change was being scrapped in December: “The Government has committed to an increase in the concessional caps for Australians aged 50 and over with lower balances. For these older Australians the contribution cap will be $50,000 from 1 July 2012.” (My italics.)
But to turn around in the Budget and blame the delay on the superannuation industry’s complaints about of the complexities of the implementation of this rule?
Oh, puh-lease! Save us the bulltish. The policy was announced in the May 2010 Budget, which has meant the Government has had two years to work on the complexities. Eureka Report even made it easy for them, by compiling a list of the largest of those complexities after we consulted industry less than two weeks after the policy was announced. See this article (19/5/10).
The concerns haven’t changed much since that time. They had two years. They were simply never addressed by the Government. It wasn’t a priority.
Did the super industry, as Super Minister Bill Shorten is suggesting, really ask for the deferral of this program by two years? Did an industry that makes more money by managing more money really ask for that? You betcha they didn’t. If they did, it was only in recent months out of frustration that nothing had been fleshed out for nearly two years.
Some parts of the industry didn’t like the policy itself. This included the Self-Managed Superannuation Fund Professionals Association of Australia (SPAA), which had been arguing for a two-year deferral. However, they argued that as a trade-off for that deferral, everyone have their concessional contribution limit lifted to $35,000, instead of the $25,000 that will now apply to everyone until at least July 1, 2014.
You got the worst of both options. A deferral and no increase to the base amount.
The losers and the costs?
There are tens of thousands of Australians who have always had reasonable incomes, but who have less than $200,000 or $300,000 in super and who are now, desperately, trying to do something about it. I see it regularly.
They have sought advice in recent years and have started beefing up their super contributions (potentially teamed with a transition-to-retirement strategy to give the plan extra bang. See this column on 28/1/11).
In the next two years, there will be a direct cost to them of between $8250 and $15,750. That’s the extra $25,000, times two years, times a tax saving of somewhere between 16.5% and 31.5% (for most people).
Multiply that and you quickly see how the government believes it is going to save nearly $1.5 billion over the forward estimates.
If you now compound the midpoint of that figure ($12,000) over 10 years to retirement at 7%, then those people will have about $23,600 less as a super base for retirement.
But that’s just an average for those who were using the strategy. For many of you, the costs will be even higher.
Strategies to combat it
Robert Gottliebsen (11/5/12) and Scott Francis (9/5/12) gave a few ideas, including considering non-super negative gearing strategies and making super contributions earlier.
I’ve been writing for years that Australians are going to have to start contributing extra to super earlier. The old rule used to be that once you hit 50, the mortgage was under control and the kids were off your hands, then you often had plenty of money to put into super. And you could put in plenty back then – as much as $100,000 per job.
But it’s become even more important now. There’s no guarantee the government will, in fact, implement the 50-50-500 rule in two years’ time. Given the near permanent freezing of indexation of most super limits since the GFC, and the reductions to other elements such as the government co-contribution (from $1500 a year to $500), don’t be surprised if the 50-50-500 limit never sees the light of day.
People will need to start contributing extra to super from the age of 40. That’s going to be difficult with monster mortgages and the huge expense of kids. But the pain is going to have to start earlier. Even if it’s an extra salary sacrifice of $2000, $5000, or $10,000 a year, it will be worth the extra pain for the years of compounding it could create within the tax-friendly environment of super.
Make the most of this year’s $50k concessional contributions (CC) cap
This is essential, if you have the capability. It’s not too late. Depending on your salary and pay cycle (weekly, fortnightly, monthly), you might still be able to shovel many extra thousands of dollars into super before June 30 via salary sacrifice.
Where this would be particularly effective would be for those who have been planning to do a total of $30k-$50k in concessional contributions (CCs) for the next few years. Dial your salary sacrifice up now for the rest of the financial year, because you won’t have a choice from July 1, to make the most of the $50,000 limit (assuming you’re currently over 50).
If you are self-employed and able to take advantage of the $50,000 CC cap, then do your utmost to maximise it this year. The choice is taken away from you for the next two financial years.
If you’re not sure of what you’re doing in this area, book yourself in with a knowledgeable financial adviser immediately.
But also consider non-concessional contributions. The government has cut concessional contribution limits from $100,000 to $25,000 a year, but has left non-concessional contribution (NCC) limits at $150,000 a year (with a three-year pull-forward for those who are eligible).
Sure, not everyone has the ability to put in $150,000 a year of after-tax money into super (which could provide tax-free income from age 60), but those who can have got to put more thought into this strategy.
Given what this government has done in recent years, I would suffer a shock factor of zero if NCC limits were the next super strategy to receive a cut.
But for the cashed up (outside super), NCC contributions should be weighed up for their ability to produce tax-free income (for the over 60s on pension in super) versus what you’re going to do with that money outside of super and pay full tax on.
SMSF gearing opportunities
There is still a way open for super funds to make themselves into giants. Seriously large entities, rather than just – relatively for most of us – vehicles that are a reasonable size. It takes time, the ability to accept significant risk and the ability to get your hands on lots of money, but it’s possible.
Gearing in super opens the door for SMSFs to open the throttle, but with a commensurate increase in risk. I won’t go into great detail here, but for those interested in how it can work, see these columns (8/2/12 and 20/10/10). These are complex strategies that require help from advisers, accountants and lawyers.
Where is super headed?
In Robert Gottliebsen’s most recent column, he suggested that super was going to become a vehicle of great impact only for the very wealthy. I respectfully disagree with that.
I think what the government is trying to do with most of the changes announced in recent years is to make super the opposite of that. They are trying to make super a backup to the government age pension.
That is, allow lots of people to put little bits of money into super (including increasing the 9% Superannuation Guarantee to 12%), so that they can increase their quality of retirement by a marginal, perhaps even significant, amount. The age pension is the baseline. Super will top that up. For most people, by not a great deal.
The “rich” can go to hell – they can invest their money outside of super where they can pay full tax, even in retirement. The changes in this budget only add to the arguments I made in this column (7/12/2011) in regards to this issue.
But most importantly, don’t delay. If you’ve have some ability to make the most of the rules that apply this year, then do so. Make it snappy. You’ve got about six weeks left of this financial year.
This government is prone to changing the rules not just yearly, but several times a year. And, sadly, it seems, the more the media points out how to make the most of super tax rules, the faster they seem to shut them down.
Catch-22. But I can’t see a way around it, apart from acting as quickly as possible.
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 highly complex and require high-level technical compliance.