Somersault into your super thanks to a backflip from the Government

It’s been a week since the Federal Government announced its backflip on its proposed superannuation reforms, and now that the dust has settled, it’s time to look at the impact the reworked measures will have on your plans for retirement.

Back in May at The Hopkins Group’s annual economic briefing, #ECON16, you might remember our discussions around the proposed $500,000 lifetime non-concessional cap. Managing Director Michael Williams laid out a bleak scenario for clients who, if they’d exceeded the cap, would have to find other avenues – outside of superannuation – to direct their retirement savings into.

“As we all know, superannuation is a tax effective environment in which to store your money, with a maximum tax rate of 15%. Once you’re in the retirement phase, a zero tax on earnings applies,” says Shane Light, Head of Advice at The Hopkins Group.

“That’s much nicer than a tax rate of assets held outside of the superannuation environment – up to 47.5%. People like the tax conditions that super offers.”

So it goes without saying that there was a huge amount of backlash in response to the Federal Government’s proposals, considering the existing annual non-concessional contributions cap is $180,000 – a far cry from the less-than-generous $500,000 over a lifetime (backdated from 1 July 2007).

But the powers that be listened. And they folded.

Treasurer Scott Morrison has come to the party and last week announced changes that allow people making voluntary after-tax contributions to their superannuation to do so, providing their balance hasn’t exceeded $1.6 million.

The changes are more aligned with the current model with an annual cap of $100,000 (commencing 1 July 2017) – still $80,000 less than the status quo, but much more generous than the half a million lifetime cap that was proposed in May.

“These revisions to the non-concessional cap proposal give our clients so much more flexibility when planning for their retirement,” says Shane who acknowledges that whilst there are more options for clients now, time is of the essence.

“It’s still a ticking time bomb though and the closer you get to 65, the harder it is to be strategic with your retirement plans. You just run out of time, and unfortunately we can’t move the cut off ages. There’s no turning back the clock!”

Shane says it’s important to act now and seek advice on how to best structure your savings to make the most of the years you have left in the workforce.

“You don’t want to find yourself ‘too old’ to make the non-concessional contributions that you had planned, and be left stuck with lump sums of money outside of super in a less tax effective environment,” he warns.
Individuals aged under 65 will continue to be able to ‘bring forward’ three years’ worth of non-concessional contributions in recognition of the fact that such contributions are often made in lump sums. But what does this mean?

If a 59 year old client was to sell an investment property and have $600,000 cash at their disposal, they could take advantage of the bring forward rule and put $300,000 (i.e. three years’ worth of non-concessional contributions post 1 July 2017) into super in one lump sum. The final $300,000 would have to sit outside of super for another three years, after which it could be deposited as another lump sum making use of the bring forward rule again. Within four years, the whole amount would be wrapped up in super.

On the flip side, if that client was 65 or older, that $600,000 would have to go in to super in instalments of $100,000 every year for six years (providing they now meet the work test), opening up the client to huge tax implications with $500,000 sitting outside of super in the first year, $400,000 in the second and so on.

“We try to find the most tax effective solutions for our clients to make sure they’re maximising their retirement savings and their money is working for them. Super is a good option and we’re pleased to see the Government has had second thoughts on their harsh budget measures,” says Shane.

“We look forward to talking to clients about making the most of these revised caps and encourage people to speak to their adviser about any age limits that may apply to them.”

Of course, nothing is set in stone and it’s just a proposed change at this stage. The government’s revised superannuation package still has to be passed by the Parliament.

For more information on what cut-off ages and caps apply to you and your retirement plans, call us on 1300 726 082 and ask to speak to a financial planner.