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Ask Janne

Published:
17/11/2016
Author:
Janne

Hi Vanessa, thanks for your email. The short answer is pretty much everyone who wants to fund a better retirement than the age pension, is affected. This is because the changes relate to both the accumulation phase of superannuation (saving for retirement) and the pension phase (retirement income). Let’s talk about the accumulation phase or superannuation as it is more commonly known. The proposed lifetime non-concessional contribution cap of $500,000 from 01/07/07 has now been scrapped. This has been replaced by a reduction to the annual non-concessional contribution cap from $180,000 to $100,000. As this starts on 1st July 2017, there is an opportunity to use the current contribution cap this financial year. If you have sold an asset or have a significant amount of cash available you may be able to contribute up to $540,000 this financial year. This is available to you if you haven’t contributed more than $180,000 in any of the past three financial years, and you are under age 65. The most significant effect of this change is that you have to start saving into superannuation earlier if you are to fund most or all of your retirement income from superannuation. In the past, you could leave your retirement planning until your fifties and still put enough money in to provide a good retirement. Those days are gone. Start planning now. If there are any more changes to superannuation, they are likely to be further reductions in the contribution caps. The reason to fund your income inside superannuation is that the income is tax free (under current legislation). This means that you can fund your income with less money. I was talking to a client the other day. He is 37 years old. He has been salary sacrificing $200 per month since he started work. He now has over $160,000 in superannuation – more than most people’s retirement benefit. He did this even when his income was very modest, and is already well on the way to a great retirement. The other change that I have been questioned about most is the pension cap of $1,600,000. This starts on 1st July, 2017. The question is: what do you do with the balance over the $1,600,000? This can be held in superannuation. The earnings will be taxed at the superannuation tax rate of 15% (10% on capital gains). Money can be withdrawn from your superannuation (at retirement or attainment of age 65). It can also be used to top up the pension to $1,600,000 if the value drops, either because of market falls or withdrawals. This provides a planning opportunity as topping up when share markets fall will allow you to potentially have a larger pension when markets recover. Let’s say you have $1,600,000 in pension and it falls by 20% to $1,280,000. You can rollover $320,000 from your superannuation to bring it back to $1,600,000. When the market recovers to its previous level, you will have $2,000,000 in your pension (less any pension payments). This does not have to be withdrawn as it is from earnings rather than rollovers. As always, this is a complex topic and it is essential to obtain professional advice relevant to your own personal circumstances. Please contact your financial planner or call me on 9452 7871. Regards, Janne.

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