The clock is ticking on major changes to superannuation that come into force on 1 July 2017.
The changes are wide-ranging and are likely to affect everyone’s retirement savings. But it can pay to plan ahead both to take advantage of the existing rules, and to make the most of the new super landscape.
Here are some of the major changes and how they may affect you.
1. New limits on non-concessional contributions
From 1 July, the annual cap on non-concessional (not claimed as a tax deduction) super contributions will be reduced from the current $180,000 to $100,000 a year.
The new $1.6 million balance transfer cap has implications for estate planning.
The bring forward rule, which allows people under 65 to ‘bring forward’ two years’ worth of contributions, will reduce accordingly, from $540,000 in any three-year period to $300,000.
Anyone with a super balance of more than $1.6 million will no longer be allowed to make further non-concessional contributions.
Key take-out: “If you’re planning a large non-concessional contribution you should consider doing so before 30 June”, says Colonial First State Technical Services Manager, Craig Day.
This is especially the case for individuals with high super balances. Also, if you have already triggered the bring forward rule either last year or this year but didn’t contribute the full $540,000, you will only have until 30 June to get the balance into super.
If you delay beyond that date you may still be able to contribute but the amount you can get in may reduce significantly under some transitional rules.
2. Lower concessional caps
Concessional (tax deductible) contributions include employer Super Guarantee payments, salary sacrifice arrangements and personal deductible contributions.
The concessional contributions cap is currently $35,000 if you are aged over 50; $30,000 if you are younger. But from 1 July, the cap will drop to $25,000 for everyone.
The good news is that, from 1 July, all taxpayers will be allowed to make personal contributions from after-tax money and claim a tax deduction. Currently only people who are predominantly self-employed or who have no employment income can do so. People aged 65-74 will, however, still need to meet the work test.
Key take-out: “If you’re currently salary sacrificing more than $25,000 you will need to review the arrangement with your employer at the start of the new financial year”, says Day. And if you do make extra personal contributions don’t forget to factor in any Super Guarantee and salary sacrifice amounts.
3. Tax changes for Transition to Retirement (TTR) pensions
From 1 July, earnings on superannuation assets used to pay a TTR pension will no longer be tax free.
Instead they will be taxed at the 15 per cent superannuation rate.
The payments you receive from your TTR pension will continue to be taxed as they are now. That is, payments are tax free if you are aged 60 or over, or taxed at your marginal rate with a 15 per cent tax offset if you are aged 56-59.
Key take-out: Day says some high-income earners may be worse off using a TTR strategy from 1 July. That’s because the income threshold at which individuals begin to pay contributions tax at the higher rate of 30 per cent, instead of the normal super rate of 15 per cent, will be lowered from $300,000 to $250,000.
“If this affects you, you should see your financial adviser to have your TTR pension reviewed. You may be better off turning it off”, says Day.
4. A new $1.6 million pension cap
For the first time, a limit will be imposed on the amount of money you can hold in a tax-free superannuation pension.
From 1 July, individuals must restrict the combined value of their pension accounts to a maximum of $1.6 million. This is referred to as a ‘transfer balance cap’ and will apply to all existing and new pension accounts.
Special rules will also apply where you receive certain non-account based defined benefit pensions, such as a lifetime pension.
Key take-out: If you think you will have more than $1.6 million in your combined pension accounts by June 30 you may need to withdraw the excess amount.
You can either shift it back into a super accumulation account where it will be taxed at 15 per cent, or remove it from the super environment entirely.
“The best option will depend on your circumstances so you should seek advice”, says Day.
5. Estate planning implications
The new $1.6 million balance transfer cap also has implications for estate planning.
If you need to transfer assets back into an accumulation account this could have an impact on your estate planning.
Also, when you die, any income paid out of your super pension to a partner or dependent child will be assessed as part of their $1.6 million pension cap.
Key take-out: The rules around super and estate planning are complex so you may need to review your estate plan with an adviser.
While these are some of the main changes to superannuation that are set to become law on 1 July, there are others that may affect your retirement savings.
The impact will be different for everyone depending on your personal circumstances, so please don’t hesitate to contact us today to review your superannuation arrangements.
Source: Colonial First State