PORTFOLIO POINT: Get your skates on. The super cutbacks in the Budget means Australians have just six weeks to make the most of the currently more generous rules.
Yes, it’s frustrating, but we’re just going to have to get used to politicians and their insatiable desire to tinker with superannuation. While constant fiddling cannot engender confidence in the system, it is a government’s prerogative.
At least they didn’t make the major changes effective as of the Treasurer’s standing up in Parliament last Tuesday night.
If there is any, the good news out of last week’s Budget changes is that the basic structure – simplification, tax-free incomes, tax-free pensions, no “reasonable benefit limits” – hasn’t been dismantled. The Labor Government has just made a political decision that some parts of the system were too generous.
There’s not much we can do but play the rules that are laid out before us. (Oh, and lobby.) And to that end, we’d better hurry. The superannuation changes announced in the Rudd Government’s Budget last week largely come into effect in just six weeks. If you need to take advantage of some of these rules, you’d better get your skates on.
Today we’ll look at 9 strategies that are available to implement now. Sadly, there are no “improvements” to super in this Budget. Action is required before July 1, in order not to get stung by the latest super regulation merry-go-round.
Some post-Budget commentary has been bewildering. One said that the changes – to reduce the higher concessional contribution limits – were only removing the “obscene” end of people’s ability to contribute to super. Another described the cuts as “progressive”, and inevitable to stop a rort.
There will be many Eureka Report readers who will bristle at those comments. There are many, many Australians who are not earning much more than the average wage who will be impacted by these changes and whose retirement will be the poorer as a result.
Is an $80,000 salary “obscene”? Sure, it’s above the national average of about $60,000, but it’s a far cry from obscene. There are plenty of people earning $80,000 (even a little less) who are desperately trying to do the right thing to fund their retirement, who will be negatively impacted by last week’s Budget changes. Yes, the changes will tend to impact those at the higher end more than those at the lower end, but there will be a lot of people earning less than $100,000 who are going to be impacted and would find it disheartening that their salaries are considered “obscene”.
How to beat the Budget changes:
- Make the most of the current arbitrage.
The biggest changes are the most costly. The concessional contribution limits get cut from $50,000 to $25,000 for the under-50s and from $100,000 to $50,000 for the over-50s from June 30.
Depending on your circumstances, if you’re not on track to hit your limit by June 30, then consider increasing your contributions prior to June 30. If you’re 55 and currently on track to salary sacrifice $80,000 this year and $80,000 next year, then speak to your employer about doing whatever you can to raise this year’s $80,000 before June 30. You won’t be able to put away more than $50,000 next year (see below), so if there’s a cash-flow issue, it should only be short term.
If you’re self-employed and are considering the usual mid- or late-June cash dump into your super account, make sure you keep in mind the change from June 30 and potentially put in a higher amount this year.
Those who can make concessional contributions on their own behalf might even want to consider selling some assets (shares, for instance) to give them cash to make concessional contributions prior to June 30.
- Start younger:
Those who are on higher incomes will need to start younger. As MLC pointed out in a post-Budget note, the cost to someone in their late 40s looking to maximise their retirement savings will be very high.
Taking into account some fairly standard assumptions, MLC says that a 47-year-old earning $100,000 that had intended to put in $55,000 to concessional contributions to super next year will be about $100,000 worse off in total retirement savings (assuming they put what is in excess of his $25,000 limit towards non-super investments) over the next 10 years.
- Review future salary sacrifice arrangements.
This is where the most number of people will probably have to make a change. While their salary sacrifice arrangements for this financial year are okay, they will have to change their arrangements for the year starting July 1 to meet the reduced contributions limits.
Don’t expect that your employer will do this for you. The consequences of contributing over your age limits are being taxed at the highest marginal tax rate.
Check with your employer that they will change your salary sacrificing arrangements from July 1 to fit into your new age-based limit of $25,000 or $50,000.
- Bring forward contributions.
Don’t leave it till next year. If you had made plans to start ramping up your concessional contributions next year, take advantage of the period to June 30.
That is, if you’re under 50 and you’d planned to salary sacrifice the full $50,000 next year, do as much as you can this year, because you simply won’t be able to do it next year. Same goes for the over 50s who were going to make use of the $100,000 limit next year.
This cut to the government co-contributions limit is the one that will have the biggest impact on lower-income earners.
In the current financial year, if a person earning less than $30,342 can contribute $1000 to super and will gain a $1500 co-contribution from the government. This limit progressively runs out at 5c for every dollar earned until it disappears completely at $60,342.
The government is cutting that maximum $1500 contribution to $1000 for the next three financial years. In the 2012-13 and 2013-14 financial years, it is intended to be lifted back up to a maximum contribution of $1250 and then back up to $1500 from the 2014-15 financial year.
If you, or a spouse, is on an income that will benefit from this co-contribution, then this year will be the best option to make the most of it for some time. For more about the eligibility criteria, see the Tax Office’s website here.
- Transition to retirement strategies
Transition to retirement strategies could be greatly impacted from July 1. In fact, TRIPs have been the almost silent victim so far. Those aged over 55 on TRIPs are going to have to check their arrangements for the next financial year. Both the amount that you salary sacrifice and the amount of the pension you withdraw from super may well need to be changed.
The calculations can be complex and you should speak to your accountant or adviser as soon as you can.
There’s no need to panic. But if your intention was to put $50,000-$100,000 in total in concessional contributions for next year, then you could be in trouble if you get to about October or November and you haven’t changed your arrangements. It would be best to deal with those with your employer prior to June 30 (or very soon after).
- Consider borrowing to fund this year’s higher limits.
It’s rare that it makes sense to borrow in your personal name to put into super (in my opinion). But for those who are able to claim a tax deduction for the contribution, it may be worth taking out a short-term loan to fund the concessional contribution of up $100,000 for this year. This could make the most sense for those people who would be able to repay the loan in total in the following 12 months.
- Extended relief on minimum drawdown
There’s no need to panic sell in the new year to fund your minimum drawdown. The government’s decision, announced in February, that it had halved the minimum pension requirement for super pensioners for the remainder of the financial year, has been extended into the 2009-10 financial year to remove forced sales of assets at current levels to fund pensions.
This means that those aged under 65 will only have to take a minimum of 2% of their balance as a pension next financial year (instead of 4%). Those aged 65-74 will have a minimum of 2.5% (instead of 5%). The limits for higher ages can be found here in a MLC post-Budget paper.
- Register for the Pension Bonus Scheme
The little-known Pension Bonus Scheme provides a bonus for continuing to work beyond pension age (65), who don’t claim the government age pension. Essentially, if you are over 65, still working, have not claimed the government age pension, you can claim a government bonus for not having claimed a pension.
The bonus can be up to $34,814.80 as an untaxed lump sum for a single and potentially up to $58,155 combined as a couple, if you work to age 70. Adviser colleague James Carson, of Charlton Financial, says this is a potentially big Budget hit for those who would have chosen to work beyond the age of 65. And it has got very little media attention.
If you are turning 65 before September 20, would be eligible for a part government age pension, are intending to continue to work for a while, then it may pay to rush to join the Pension Bonus Scheme. If this may apply to you, contact your adviser, or Centrelink, which will also work through whether this scheme is worthwhile for you.
Note: All of the strategies mentioned above are general advice and are not intended to be acted on without having your personal financial situation taken into account. If you believe that these strategies might be of some value to you, then please contact your adviser for more information.
While the smell of broken election promises is in the air, we’d best not forget to mention AXA’s recent backflip.
AXA launched a new product range as part of its super guaranteed products (as part of it’s AXA North range) in the last year. AXA used “dynamic hedging” as the protection method and was the only one using this method in Australia.
The real advantage of the guarantee was that it would allow investors to switch on and switch off the guarantee as they chose. Indeed, for more than a year, AXA’s sales force had been inviting advisers to abuse this feature on behalf of their clients.
Naturally, many advisers and clients did exactly. Many were switching the guarantees on and off several times a week to make the most of the current markets. Exactly what they were told they could do.
AXA’s senior management announced earlier this month that daily switching was no longer going to be allowed. Switching on and off could only be done every three months.
Bruce Brammall is the principal financial adviser with Castellan Financial Consulting and author of Debt Man Walking.