Commencing on 1 July 2017, we will again see significant reform to superannuation with the intention to make the system fairer and more sustainable for all Australians. The environment will be more restrictive, the generous benefits we have seen in the past will not be afforded to Generation X and those that follow. However, all is not lost as there is no question that superannuation will remain to be a highly tax-advantaged investment vehicle to accumulate savings for retirement and provide income thereafter.
In breaking down the superannuation reform, it is clear that in the future individuals will need to be proactive and start planning earlier to get the best outcome in retirement. The interim period leading up to 1 July presents an opportunity to restructure your superannuation fund and take advantage of the current rules as they stand. The time to take action is now.
Accumulation phase – saving for a healthy retirement
Those saving for retirement will see the annual dollar limit which they can contribute to their fund slashed to $25,000 for concessional contributions and $100,000 for non-concessional contributions. Looking forward, to get the maximum benefit from the superannuation system, you should consider:
• Their ability to contribute in the current financial year; far more favourable contribution rules remain in place until 1 July.
• Making voluntary contributions to your fund earlier in life. Planning earlier for retirement will deliver greater value under the new regime. Each year you fail to use your full contribution eligibility, you will limit your ability to build wealth for retirement in the most tax-effective manner.
In addition, there will be greater opportunities by way of the low income superannuation tax offset and improved accessibility to make spouse superannuation contributions.
When contributing to superannuation, it is important to understand when you will be able to access your accumulated benefits and consider the age which you intend to retire from the workforce. Under the current rules, superannuation can be accessed at age 65 or at retirement after a compulsory preservation age which is 60 for most people.
Pension phase – funding your retirement
From 1 July 2017, an individual may only hold a maximum of $1.6 million in the tax-free superannuation mode known as pension phase. Fund balances in excess of the threshold must be held in an accumulation phase account which is subject to a tax rate of 15 per cent on fund earnings. Additionally, individuals with transition to retirement pension accounts will be levied with 15 per cent tax on investment earnings.
It is important to avoid blindly withdrawing funds from superannuation on the assumption that increased tax will negatively impact you. For most people, maximising your superannuation balance will remain the most tax-effective method to save and invest. Additionally, you should consider the following:
• The $1.6 million cap on pension assets is available to each individual. For couples, it may be beneficial to look to contribute strategically to equalise your superannuation balance with that of your spouse.
• Under the new rules, you may be required to hold multiple superannuation accounts and the costs of administration charged to your fund may increase. You should reconsider the vehicle in which you hold your superannuation and whether this remains the most appropriate for you. For example, an SMSF may be more attractive under the new regime as it will generally attract a fixed administration fee and adopt a single investment pool to support multiple member accounts.
The consequences of the new superannuation rules are far reaching. For instance, existing estate planning provisions may no longer have the intended effect. For this reason, professional advice and a strategic review of your superannuation and retirement plan may very well be the best investment you can make.
Michael Turner, associate advisor, Moore Stephens Victoria