Published in The Australian – How to bridge the gap on concessional super limit
- THE federal government’s controversial decision to cut back on the scale of concessional (pre-tax) contributions to superannuation has certainly cast a shadow over potential retirees’ plans to rev up their super balances, but all is not lost.
First, the bad news. For the next two financial years the pre-tax (concessional) superannuation contributions for those over the age of 50 is now capped at $25,000.
This measure, announced by Treasurer Wayne Swan, was one of the ways to help achieve the elusive budget surplus that the Gillard government so desired.
By introducing such barriers, the government has effectively reduced the number of future self-funded retirees – and potentially increased the strain on the social security system.
Compulsory super contributions were introduced by the Keating government in 1992 at 3 per cent and reached 9 per cent only in 2002, which means many Australians in their 50s and 60s will not have enough money to enjoy a financially secure retirement. They would relish the opportunity to contribute significant amounts into super by way of salary sacrifice.
Since 2009 the cap for pre-tax super contributions for those aged over 50 has been $50,000 a year (previously, between 2007 and 2009, this amount was $100,000 a year).
The pre-tax super contribution cap dropped from $50,000 to $25,000 from July 1 until June 30, 2014, after which it is due to revert to $50,000 a year (or slightly higher if indexed at that time).
It is unfortunate if your long-term retirement plan had included maximising your salary-sacrifice contributions over the next two years.
There was also an additional condition placed on the higher concessional contribution cap from the 2014-15 financial year.
To be eligible for the $50,000 cap, not only must you be aged over 50 but also have less than $500,000 in superannuation assets.
The government is signalling that if you have $500,000 or more in super, that’s probably enough and anything you wish to contribute pre-tax above the $25,000 cap will be taxed at the highest marginal rate of 46.5 per cent. This severely limits your ability to increase superannuation leading up to retirement.
Those with super account balances close to $500,000 who wish to maximise salary sacrificing after 2014 should consider strategies to increase their chances of accessing the higher contributions cap beyond 2014.
Now the better news: the key is to keep your superannuation balance less than $500,000 after July 1, 2014.
A case study on a recent client illustrates how they are likely to achieve this.
John and Mary are in their early 60s. They have a self-managed super fund: John has a balance of $470,000 and Mary has a balance of $150,000. John and Mary earn $100,000 and $40,000 respectively a year.
For the past few financial years, John has been contributing the maximum $50,000 into super with a mix of employer contributions and regular salary-sacrifice contributions. He is concerned the reduction in the pre-tax contribution cap will reduce his ability to contribute to super over the next five years leading up to his retirement.
It was recommended that John begins a Transition To Retirement pension and drawdown, the maximum pension being 10 per cent of the account balance each financial year. As John is aged over 60, the 10 per cent pension drawdown is non-assessable income and not subject to any income tax and not included in John’s personal tax return.
The recommendation was that the pension income be contributed to Mary’s super account.
It was also recommended that John implements contribution splitting with Mary. Under contribution splitting arrangements, John is able to annually split or redirect 85 per cent of his pre-tax super contributions (salary sacrifice and employer superannuation guarantee) from his super account to Mary’s account.
The projected outcome of these strategies for the 2012-2013 financial year is shown in the following table, ignoring investment movements and taxes.
On July 1, 2014, John’s super account is projected to be $387,825, meaning he is likely to be able to contribute $50,000 per year of his pre-tax income (including employer contributions) into super beyond 2014, rather than being capped at $25,000 per year.
Had John not implemented the strategies, his super balance would likely have exceeded $500,000 on July 1, 2014 and the lower $25,000 concessional contribution limit would have applied.
There are also two additional benefits of this strategy for John and Mary:
By commencing a transition to retirement pension, the tax rate on income and capital gains for John’s super balance in the SMSF pension account reduces from as much as 15 per cent to zero.
This strategy helps to equalise Mary’s super balance. This protects against any potential future legislation that may penalise or tax people with higher super account balances. By keeping both spouses’ super balances relatively equal, this risk is minimised.
Although the government is changing the contributions caps for people wishing to contribute money into super before tax, by implementing strategies over the next two financial years, it may be possible for those with close to $500,000 in super to continue to contribute the higher pre-tax contribution limit from July 1, 2014.
Personal financial advice that takes into account your specific circumstances is recommend before implementing any of the aforementioned strategies.
James Gerrard is a certified financial planner with PSK Financial Services