In control: sizing up your super choices
Taking charge of your superannuation investments doesn’t necessarily mean running your own fund.
Some of the most significant changes last year were felt the most by those with high balances in their funds, and employees who salary sacrifice into super.
For the former, a ‘transfer balance cap’ was introduced from 1 July 2017 limiting the amount that could be transferred to a retirement phase income stream, such as an account-based pension, to $1.6 million. The balances of existing income streams held at 30 June 2017, and the starting values of any commenced since then, counts towards this cap.
Amounts over $1.6 million must be transferred back to an accumulation phase super account or withdrawn from super. Otherwise a penalty tax will be applied, effectively removing the tax advantage of leaving the funds in the pension phase and in some cases providing further penalty.
Salary sacrifice1 is used by many to increase their super fund balances by having some of their salary paid directly into super in addition to the employer’s compulsory contributions. Salary sacrifice payments are concessional (before-tax) contributions and the cap on concessional contributions2 has been reduced to $25,000.
Colonial First State’s Executive Manager of Technical Services, Craig Day, believes that most investors who are salary sacrificing, or those with high fund balances, are likely to have already taken action and may be now looking to fine-tune their super strategies.
Changes to the deductibility rules around making personal contributions means people may also be able to claim a tax deduction for making personal contributions towards their retirement.
For example, since 1 July 2017, employees can take advantage of the removal of the 10 per cent self-employment test to be eligible to make personal tax-deductible (concessional) contributions into superannuation, he says.
Under the new rules, just about anyone who is eligible to contribute can make year-end personal superannuation contributions and claim a tax deduction for it.
In light of the new changes, it’s also time to review your life insurance and estate planning arrangements. Especially because the $1.6 million cap on funds held in retirement phase also applies to death benefit income streams.
While Day notes that there aren’t many investors who have accumulated more than $1.6 million, a life insurance payout added to a fund balance may exceed the cap.
Meanwhile, the cap for non-concessional (after-tax) contributions has also been reduced from 1 July 2017. It’s now $100,000 per year but a ‘bring forward3’ rule applies, allowing you (if eligible) to pay three years’ worth of contributions (or $300,000) in a single year.
There is also a new restriction on making non-concessional contributions for people with high super balances. If a person has a total superannuation balance (just prior to a financial year) of between $1.4 million and $1.6 million, the amount they can contribute will be reduced. If someone has $1.6 million or more, they will not be able to make any non-concessional contributions.
So you may need to check your super balances before making any contributions under the new rules.
Talk to a financial adviser before you make any decisions, because there are still many benefits from having a transition to retirement income stream.
Transition to retirement
Another big change in 2017 was to apply a 15% tax to investment returns on assets supporting transition to retirement income streams4 (TRIS) where the member has yet to retire (or meet another eligible condition of release). These investment returns had previously been tax free.
For people with a TRIS who are still working and salary sacrificing extra amounts into super, it’s important to make sure you’re aware of how the changes, including the reduction to the concessional cap, may affect your retirement strategy, says Day.
“But talk to a financial adviser before you make any decisions, because there are still many benefits from having a transition to retirement income stream. And while the rules have changed, it may just mean that benefits of those types of strategies have been reduced, but they may still be viable,” he says.
The biggest changes for 2018
Two of the biggest and most radical changes to superannuation are coming this year – downsizer super contributions and the first home super saver scheme.
The first allows people aged 65 or more who sell their homes to make extra contributions to their super of up to $300,000. The home must have been the person’s primary residence at some time and must have been owned for at least 10 years. Normal contribution rules (eg having to be under 75 and meet a work test) and other contributions caps don’t apply.
Day says it’s an opportunity for people who are looking at downsizing into a smaller or less expensive home to top up their super with any surplus sale proceeds.
“The interesting thing about it is that it applies for both the person owning the house as well as their spouse, so even if the house is in only one person’s name, a couple could still get up to $600,000 into superannuation where they’ve essentially been prohibited from contributing for the last couple of years because they’re over 65 and retired,” he says.
It’s important to note that the rule only applies where the contract of sale of the relevant property is exchanged on or after 1 July 2018 and the contribution is then made within 90 days of settlement.
“So, if you’re planning to sell anyway, it’s worth planning the dates carefully,” says Day.
Savings boost for first home buyers
First home buyers haven’t been forgotten in the raft of super changes with a new rule allowing them to make extra contributions to their super, up to $15,000 per year to a maximum of $30,000.
When they’re ready to buy, they’ll need to apply to the Australian Taxation Office for the funds to be released. They’ll generally have up to 12 months to buy a property using the funds.
“For those making additional contributions, they’ll get the benefit of the concessional tax rates in superannuation for any investment earnings. There will also be a deemed return on these amounts, so you’ll have a reasonably good idea of the amount you’ll be able to save,” says Day.
“There’s a government estimator that will allow you to estimate the additional savings you may be able to get into superannuation because of these rules. The additional amounts are not huge, but they’re certainly worthwhile thinking about.”
Day says the first home super saver scheme may have the added long-term benefit of improving engagement with super among younger people.
Get in touch with your financial adviser to see how the changes affect you. You can also read information about the rules from the Australian Taxation Office.