Retirement
Which budget measures should I incorporate into my superannuation planning?
Retirement
Which budget measures should I incorporate into my superannuation planning?
Which budget measures should I incorporate into my superannuation planning?
The 2016 federal budget contained some of the biggest changes to the superannuation system since 2007. While these announcements are only proposals, it’s important to consider how they can affect your retirement plans.
Most of the proposed super changes are not effective until 1 July 2017, but one key proposal – a $500,000 lifetime cap on non-concessional contributions made since 1 July 2007 – could take effect from budget night (that is, from 7.30pm AEST, 3 May).
Any non-concessional contributions you made before budget night cannot result in an excess contribution, but if you have contributed more than $500,000 you could have already used your lifetime cap. Non-concessional contributions made after budget night that exceed the cap (taking into account all non-concessional contributions since 1 July 2007) will need to be removed or be subject to the current penalty tax arrangements.
You may wish to contact your superannuation funds to find out how much of your lifetime cap you have used before making any further non-concessional contributions. Longer term, the lifetime cap may restrict your ability to move funds into the tax-effective superannuation environment, which might affect your retirement plans.
Another important proposal is the introduction of a $1.6 million transfer balance cap, which restricts the amount of superannuation you can transfer from accumulation to pension phase. If implemented, the transfer balance cap will be effective from 1 July 2017 and includes the balance of existing pensions. Amounts in pension phase that exceed $1.6 million will be required to be withdrawn or moved out of the tax free pension environment to accumulation phase, where earnings are taxed at 15 per cent.
If you are likely to be affected by the transfer balance cap, you may want to review your retirement plans and consider strategies such as spouse contributions to reduce pension balances (where possible).
We also saw a lot of interest on the removal of the tax exemption on assets in pension phase for transition to retirement pensions. From 1 July 2017, earnings on assets that support a transition to retirement pension will be taxed at 15 per cent rather than zero. If implemented, this will have a big impact on the tax effectiveness of transition to retirement pension strategies. If you currently have a transition to retirement pension, or were considering commencing one, you may want to review your decision to ensure it’s still right for you.
This is particularly important when considering the impact of another budget proposal; the reduction in the concessional contribution cap to $25,000 a year. If legislated, from 1 July 2017 the concessional cap will reduce from its current levels of $35,000 a year for those aged 50 and over, and $30,000 a year for those under 50, to the new cap amount of $25,000 a year.
This proposal reduces your ability to salary sacrifice and make tax-effective personal deductible contributions to super. It also makes transition to retirement pension and salary sacrificing strategies less attractive.
On the positive side, some budget announcements will help people build their super balances. One proposal allows you to carry forward amounts of unused concessional cap over a five-year period, as long as your superannuation balance is less than $500,000. The government says this measure will encourage those who take breaks from the workforce the opportunity to 'catch up' if they have the capacity and choose to do so. It appears this proposal is open to everyone, so we might see more people using strategies like making large concessional contributions and using the deduction to reduce assessable income in high income years.
Another positive proposal, to take effect from 1 July 2017, allows people aged between 65 and 74 to contribute to super without having to meet a work test. Under current rules, once you reach age 65 you are required to work 40 hours within 30 consecutive days in the financial year you make a super contribution.
In addition, everyone under age 75 will be able to claim a tax deduction for superannuation contributions regardless of their work status. If implemented, this proposal creates strategies such as making deductible superannuation contributions in addition to salary sacrifice, or after retirement.
Craig Day, executive manager CFS FirstTech
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