It saddens me that people are scared or hesitant to contribute to their superannuation due to the changes coming into effect on the 1st of July this year.
It is clear that the majority of the changes to superannuation that come into effect on the 1st of July are directed towards the fortunate few who have superannuation balances over $1.6 million.
Let’s be clear. Superannuation is still a great vehicle to save and plan for retirement. Here is why:
1) Whilst you are working, all earnings are taxed at 15% and capital gains are taxed at 10% (if the asset is held for more than 12 months). As opposed to being taxed at your marginal tax rate which can be as high as 45%.
2) When you are retired, if your member balance is under $1,600,000 your income and capital gains ARE STILL TAX-FREE!
The Australian Superannuation Funds Association estimate that a couple who own their own home need around $60,000 to live a comfortable retirement. A comfortable retirement lifestyle enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.[1]
Assuming a modest 3.50% income return after management expenses and without the need to draw on capital, a couple with a combined superannuation balance of $1.7 million (Assuming a balance of approx. $850,000 each) will still pay no tax on their investment earnings inside superannuation. With a member balance of $850,000, you have only used 53% of the $1.6 million pension cap before you are anywhere near having your pension taxed.
It’s very simple. Most Australians need not worry about their pension being taxed in retirement. According to the Australian Bureau of Statistics, the average superannuation balance for men aged 65-69 is $354,564 and for women in the same age group it is $249,183.[2]
It is clear that the majority of the changes to superannuation that come into effect on the 1st of July are directed towards the fortunate few who have superannuation balances over $1.6 million.
Even with the smaller contribution caps to superannuation, here is how you can maximise your superannuation balance in preparation for retirement:
1) If you home is paid off and your children are starting to become financially independent, consider maximising your concessional contribution to your superannuation each year. After the 1st of July 2017, you can contribute a maximum of $25,000 per annum and this includes any contributions from your employer, who is obliged to pay 9.50% of your salary to superannuation. Concessional contributions are only taxed at 15% and not at your marginal tax rate.
2) If you have surplus cash savings or shares in your own name, you can contribute up to $100,000 per annum as non-concessional contributions (non-taxed contributions to super). Or you can bring forward three financial years of contributions to make one lump sum contribution of $300,000.
3) If you have a self-managed superannuation fund, it may be possible that your fund can borrow money to purchase assets such as shares or property. This will help to increase your capital base and to generate a larger return. However, like with any lending strategy, precautions need to be taken that you have not borrowed too much and that you can continue to service the debt in the event of redundancy or illness. The ATO has given clear guidelines on how self-managed superannuation funds can borrow money.
4) The Government co-contribution still makes sense where a $1,000 non-concessional contribution will be matched with up to a $500 co-contribution from the Commonwealth Government. This is available to people who earn under $51,021.
In summary, superannuation is and remains a great vehicle to help Australians plan for retirement. Don’t be put off from the new headlines of changes and uncertainty. My job as a Financial Planner is to help explain how superannuation and the incentives available can help plan for a rewarding and comfortable retirement. Don’t be afraid to ask for help on how you can maximise your strategy to provide peace of mind for when you retire.
1. ASFA Retirement Standard
2. ABS – 41250DS0001 Gender Indicators, August 2016
Andrew Zbik
Senior Financial Planner
Omniwealth
t: (02) 9112 4316
m: 0422 038 253
e: andrew.zbik@omniwealth.com.au
www.omniwealth.com.au