- 28 February, 2017
Walking a tight rope, without a safety net
Just ten months ago the government released its 2016 Budget. Amongst its many pages were the most far-reaching superannuation changes in a decade. But, where are we today?
Well, we have had an election that saw the government return by the very slimmest of margins, but most of the superannuation reforms have passed into law. In the most part, they are due to take effect from 1 July this year. That is in just four short months.
Most Australians, despite media hype to the contrary, will be largely unaffected to any significant degree.
One of the Budget reforms will see a reduction to the amounts we may contribute to super each year.
Yes, I agree that the reduction in the amount we can contribute will have an impact on some, however, we have come through relatively unscathed.
Often I hear people say that the government is wrong to restrict the amounts that can contribute to super – they should be encouraging us to contribute as much as possible.
Let me assure you that I fully appreciate this sentiment and people should be encouraged to save for their own retirement. After all, the objective of superannuation is to substitute or supplement the age pension.
However, there is a very fine balancing act going on here.
Super is taxed at very favourable rates. The maximum rate of tax a super fund pays is 15%.
But in many cases, a super fund pays no tax at all, particularly where a fund is paying pensions to members. Compare that to paying tax on income and investment earnings at your marginal tax rate where the rate can be as high as 49%. I know which tax rate I’d like to pay!
It is therefore a ‘no-brainer’ to understand that folk who are paying personal tax at a rate of 15% or more are likely to be attracted to super. And those on the higher tax rates are more likely to have the money available to make additional contributions to super.
We therefore have a situation where the individuals with the financial capacity to make large superannuation contributions are often those in the higher tax brackets. And they are keen to take advantage of the super tax rates. This, I think is where the mismatch between targeting tax concessions to those who need them most, and encouraging people to provide more for their own retirement, becomes reality.
The government is in a difficult position. It is like walking a tight rope across the Grand Canyon, without the safety net!
How does the government best target tax incentives to encourage the wider population to save more for retirement and, at the same time, limit the tax concessions available to the more wealthy?
The preferred, and perhaps simplest option is to restrict the amount that may be contributed to super.
Are the reduced contributions caps (limits) that come into effect on 1 July 2017 set at the right level? Only time will tell. Since the contributions caps, in their present form, were introduced from ten years ago, we have seen a lot of tweaking of the actual caps. Without a doubt, we will see more changes in the future.
The annual concessional and non-concessional contribution caps coming in on 1 July, whilst being more modest than those that currently apply, will generally be more than adequate for the majority of Australians wishing to save for their own retirement.
In fact, ignoring future increases in the new contributions caps, an individual with the capacity to pay, can still make net contributions of up to $1,412,500 over a ten-year period. And, if they are a couple, multiply that number by a factor of two! The likelihood of most Australians being able to accumulate that level of superannuation savings over a lifetime of work, let along over just ten years, is highly desirable but, highly unlikely.
Even for the wealthy who have the capacity to make significant contributions, superannuation remains a very effective vehicle for accumulating savings for retirement and then managing the progressive drawing down of those savings in retirement.
Even though the goal posts have moved at little, with careful planning and some good advice, strategies exist that will enable significant savings to accumulate within the superannuation system.
And, for those readers looking for opportunities before the 30 June 2017, consider making concessional and non-concessional contributions under the current, more generous caps. However, if seeking to make large contributions, seek professional advice before making a contribution.
The Realise Your Dream blogs are written by Peter Kelly and Mark Teale. More information about the authors can be found here