How will the new super contributions cap rules affect you?
As part of the 2016 Federal Budget and subsequent announcements, the Government is making significant changes to super contribution rules.
Superannuation is how most Australians save for retirement. Whether you work full time, part time or casually, your employer is generally required to deposit a percentage of your salary (currently 9.5 per cent) into your chosen superannuation fund.
This is then invested for you, so it can provide an income in retirement.
To access your super, you must generally have reached your preservation age (between 55 and 60, depending on when you were born), and have retired, stopped work after age 60 or reached age 65.
Are you investing enough in super?
Even with employer compulsory contributions set to rise to 12 per cent in future, unless you make additional contributions, your super may not be enough to give you the retirement lifestyle you want.
According to the Association of Super Funds of Australia (ASFA), a couple retiring now who want to live a ‘comfortable’ lifestyle will need a lump sum of at least $640,0001 – assuming they also receive some age pension from the government. A single person will need at least $545,000.1
Reaching that amount on the average wage – especially if you take a career break to care for family, study or travel – might not be so easy. That’s why it’s worth topping up your super balance with voluntary contributions when you can – and there are tax incentives for doing so.
Salary sacrifice and save
Salary sacrifice involves swapping some of your before-tax salary for increased employer super contributions. By contributing some of your before-tax income through salary sacrifice, you could not only boost your super, but also save on tax. That’s because salary sacrifice contributions are generally taxed at just 15 per cent2, rather than your marginal tax rate which can be up to 49 per cent (including applicable levies).
Along with our employer’s compulsory contributions, salary sacrifice contributions are classed as ‘concessional contributions’. Currently you can make up to $30,000 in concessional contributions in a financial year (or $35,000 if you were 49 or over on 30 June 2016). However, this will reduce to $25,000 for everyone from 1 July 2017. If you go over this cap, additional tax applies.
Put your bonus or inheritance into super
Another way to build up your retirement savings is to add some after-tax (or ‘non-concessional’) contributions. For example, if you get a bonus, cash gift or inheritance, or you sell a large asset, it’s worth considering putting it into super.
Currently these contributions are capped at $180,000 a year. If you’re under age 65 any time during a year, you’re able to apply the ‘bring-forward’ rule. This allows you to make up to three years’ worth of non-concessional contributions (currently $540,000) at any point during a three-year period.
The annual non-concessional cap will reduce to $100,000 from 1 July 2017. This reduces the bring-forward rule to $300,000 at any time during a three-year period.
In addition, from 1 July 2017 the Government will no longer allow you to make any further non-concessional contributions once your total super balance reaches $1.6 million.
Extra tax may apply if you make contributions above your non-concessional cap.
Find out more about the changes to super contributions.
Take action now
With these changes taking effect on 1 July 2017, it’s worth considering taking action in the short term, for example, by making higher non-concessional contributions if you are in a position to do so.
By putting in just a little extra now, you can make all the difference in the future. If in doubt, it’s a good idea to talk to a financial adviser. They can recommend a financial strategy to help put you on the right track towards a comfortable retirement.
1 ASFA Retirement Standard, Association of Superannuation Funds of Australia, September quarter 2016
2 30 per cent if you earn $300,000 or more per year. This will reduce to $250,000 from 1 July 2017.