The Government has announced a package of superannuation rule changes that appears likely to pass through both houses of Parliament. The Opposition has criticised the Government over its “backflips” but seems likely to vote for the bill.
If so we will have a super system with more clarity and focus on its end purpose. Pension accounts enable people over age 60 to invest tax free. There is no tax on the earnings in the account and no tax on the regular payments to the investor. That won’t change.
What will change is that there will be a limit on how much retirees can have in this tax free environment - $1.6 million.
High earners and wealthy people will have to invest their extra money in other ways. It is hard to argue with the principle of having an upper limit on use of this completely tax free area.
An amount of $1.6 million invested conservatively to earn three per cent interest would generate $48,000 annual income.
A couple could have $96,000 per annum. Those figures won’t pay for a luxury lifestyle but should provide a sound living standard. If they invest in more diverse areas they should be able to earn much more.
So the target has been set: $1,600,000.
In aiming to get there people must work within contribution limits. Tax deductible contributions will be capped at $25,000 per annum from July, 2017.
They are currently only accessible to employers and the self-employed. Employers pay super guarantee amounts and employees can put extra in by sacrificing part of their salaries.
From 2017 employees will be able to make direct contributions and claim tax deductions for them. If they fail to use their $25,000 limit in a year they will be able to carry it forward for up to five years from 2018 on.
However people over age 65 and not working will not be able to make contributions, contrary to what I said last week. That was a late change. The current limit for non-concessional contributions is $180,000 per year.
From July, 2017 it will be cut to $100,000. The proposed $500,000 lifetime limit starting from 2007 is gone, as it should be.
Investors will still be able to bring forward two years contributions. That will allow $300,000 to go in per three-year period. From now until June 2017 the existing rules continue to apply.
So $540,000 (three times $180,000) can be contributed in the next nine months by anyone under age 65 who hasn’t already used the bring-forward rule.
Each person should now work out a plan to grow their super towards the $1.6 million limit by retirement using time and the power of compound interest.