The biggest changes to the superannuation rules for many years came into force on July 1. What have the effects been and what should investors be doing as a consequence?
Subscribe now for unlimited access.
$0/
(min cost $0)
or signup to continue reading
The change that affected the most people was the new lower limit on concessional or tax deductible contributions. These are employer super guarantee contributions plus salary sacrifice amounts. Previously $100,000 per year, then $50,000 and then $35,000, the limit was cut to just $25,000.
If a person arranged $25,000 of contributions every year of a 40-year working career they would have plenty of super for a comfortable retirement, but that isn’t the usual pattern. Most young people are focused on buying and paying off a home, and raising children.
Retirement funding is a low priority. They don’t do any super salary sacrifice. It’s only when promotions and pay rises come, and mortgage and family costs are under control, that they start to boost their super contributions.
With a $25,000 annual limit that may be too late to accumulate the amount they would like. This is especially the case for people over age 50 who have not had compulsory employer super all their careers.
This new rule means people need to consider contributing more to super earlier, by salary sacrifice, as they may not be allowed to put enough in late in their careers to reach their desired retirement goal.
For example, if their annual salary is $80,000 their employer contributions will be nearly $8,000 so they can sacrifice up to $17,000 of pre-tax pay, or $320 per week. They may not be able to afford that much but putting some extra in from an early age is very important.
The limit on non-concessional or non-tax deductible contributions was also cut, to $100,000. This isn’t usually a problem for most people, but the same principle of needing to get more into super applies.
Large sums of money usually only come available occasionally, such as from an inheritance or sale of a property or business. Maximising these contributions when the money is available is important.
Only a small number of people are affected by the new $1.6 million limit on retirement pensions. Those who are must decide whether to leave the excess in an accumulation account paying 15 per cent tax or withdraw it from super.
There is a new rule allowing anyone, including employees, to make contributions and claim a tax deduction. There is also a new, much more generous spouse contribution rule. These will suit many people and come into focus much more towards the end of the current financial year.