No limit on super, just pension

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Bruce Brammall, 18 October 2017, Eureka Report

SUMMARY: A limit of $1.6m in super? No! You are unlimited as to how big you can grow your super fund.

There is an absurd misunderstanding gaining traction around the country about superannuation.

It’s a message that the government hasn’t been deliberately pushing. However, it certainly won’t be going out of its way to correct or deny.

It’s this: You can’t have any more than $1.6 million in super.

The inaccurate belief is leading to thoughts that, if you’re on track to hit more than $1.6 million, you should start restricting your super contributions and even curtail investment strategies and start looking for other investment options outside of super earlier in life, rather than later.

Based on many conversations I’ve had in recent weeks, it seems to be a virus inflicting those in their 40s and 50s – people who are still at the peak of earnings and, therefore, being able to grow their super.

The concept is completely and utterly false. And it’s bloody dangerous to your finances, particularly those younger Australians on higher incomes. And could lead to donating extra to the tax office over most of a lifetime.

The government has not said that you can’t have more than $1.6 million in super.

They have said that you can’t transfer any more than $1.6 million into a tax-free pension fund.

There is a huge difference. You can, through smart contributions and investing, potentially have $10 million in a super fund, by the time you were about 65. (It’s just going to be harder to do, with lower contribution caps.) At that point, you could transfer $1.6 million, or whatever inflation has taken the “transfer balance cap” to by the time you retire.

The remainder can stay in the accumulation phase of superannuation indefinitely.

The restrictions on the amount that is transferred to a pension fund is what the government has done is stop people from having monster pension funds that pay no tax whatsoever – on any amount of income or capital gains they make.

You could, and generally should, in that situation retain the other $8.4 million in superannuation.

“But then it’s going to be taxed!” I’m being told.

Correct. But that remaining $8.4 million sitting in accumulation phase in superannuation is not going to be taxed any higher than 15% on any earnings it makes (based on the current rules). And if it is a capital gain for an asset that it has held for longer than a year, it will pay an effective rate of only 10% on the gain.

“Wouldn’t you take that money out of super so that it’s not taxed?” I recently got asked.

No! If you took that $8.4 million out of super, anything it earned, or anything that you gained on those investments, is going to be taxed at marginal tax rates. The top marginal rate, currently, is 47%. And capital gains for those people is at 23.5%.

You can reasonably safely assume that if you have managed to amass $10 million in super, or even half that figure, then you are likely to also have substantial assets outside of super, which are also probably earning you a taxable income. Pull that $8.4 million out of super and anything it earns will literally go on top.

I’m hearing this unfounded rubbish from some reasonably smart people, who have, for their age, got a fair sum in super. One had already been around to interview a few financial advisers about their wealth creation plans, but still believed this to be true.

Yes, the changes that came into force on 1 July, 2017, are the biggest and worst changes to superannuation in 30 years, probably more. The government has restricted pension funds to $1.6m, are taxing transition-to-retirement pension funds for the first time, and have made it harder than ever before to get money into super, with tough, lower, restrictions on concessional and non-concessional contributions.

They have effectively said $1.6 million is enough of a lump sum to be in a tax-free environment.

But, for now at least, they are not restricting how much money you can have sitting in the low-tax environment that is accumulation super.

So, even for those who think they are likely to smash the $1.6m limit to put into their pension fund, getting as much into superannuation as you can is still going to make a lot of sense in most cases.

This is because the earnings will almost always be lower than what you’ll play on the same returns outside of super in your personal name.

(I’ve got some more reading for those interested. Check out these columns for more information. To learn more about the decision on how to minimise tax via the three-pot strategy, see 21/12/16, and for how a young’un can create a $10 million super fund, click 12/7/17.)

Read the three pots strategy in particular, to find out how you would spend your money in retirement when you have a pension fund with $1.6 million in it, plus other money inside and outside of super.

Generally, it will be:

  1. Take the minimum pension from your pension fund.
  2. Then, if you have earnings above $37,000 outside of super, where the marginal tax rate kicks up from 19% to 32.5% (not including Medicare), spend some capital from outside of super.
  3. Take lump sums out of your superannuation accumulation account.

But if you feel you can knock the ball out of the part a develop a $5m or $10m super fund, from this point, then you’re unlikely to be in a worse financial situation than ignoring super and building wealth outside.


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 extremely complex and require high-level technical compliance.

Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: . Bruce’s book, Mortgages Made Easy, is available now.


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