In last year’s federal budget, the government announced the launch of its new, simple super regime, with new tax benefits and the removal of reasonable benefit limits giving Australians more reasons to save, and greater flexibility when it comes time to drawing down their superannuation income.
Currently, much of the super hype in the press and financial sector advertising is focused on what many are calling the “million dollar super window” – the chance to make undeducted contributions of up to $1 million before the end of the financial year. But once that deadline passes, what issues under the new regime should pre-retirees be aware of?
Perhaps one of the most crucial changes is the introduction of a new super cap – limiting the amount of contributions which can be made. As such, Colonial First State’s senior technical analyst Deborah Wixted says individuals should ensure any “last-minute” contributions to super planned prior to retirement can be made within the new contribution limits.
She explains: “Those under age 65 will be limited to contributing $450,000 tax-effectively (without 46.5% tax applying) as a non-concessional contribution in one amount, with nothing further for the following two financial years. Those already age 65 or over are limited to $150,000 of tax-effective non-concessional contributions each year.”
Wixted also notes that individuals need to ensure that the tax-free component of their super benefits is maximised. “This is important for people who retire before age 60 or who plan a ‘transition to retirement’ strategy and for those whose super death benefits may be inherited by adult children. In these situations, tax will be payable on the part of the benefit that is not a tax-free component; maximising the tax-free component therefore minimises this tax.
“Consolidation prior to 1 July 2007 of super benefits where there is pre-83 service, recontribution strategies and additional undeducted/non-concessional contributions within the relevant caps could all be useful.”
She also suggests that individuals consider carefully the timing of their retirement, and the manner in which they convert super benefits to an income stream. “Compulsory cashing of super benefits is one of the simpler super reforms and means that a person could leave their super accumulating and untouched indefinitely.
“Once a person becomes eligible for an age pension, there is no extra benefit in doing this – the amount held in super will be assessed as a financial investment, asset tested and subject to deeming under the income test. Similarly, there is little taxation incentive for remaining in super, as all investment earnings on benefits used to fund an income stream are tax-free.”
Australians will also need to assess what level of investment risk they are comfortable with. Wixted says: “The decision on what type of retirement income stream to use under the new rules will essentially become one of whether or not to take market risk. All retirement income streams are taxed similarly and, after 20 September 2007, will be assessed in the same way for age pension purposes, meaning that the underlying nature of the way income is provided will be the deciding factor for retirees.”
Ray Griffin, managing director of Griffin Financial Services provides some words of warning: “For people retiring after 1 July this year it still, basically, comes down to how much income they need and how much capital they have. While the generous tax benefits for superannuation pensioners, over age 60, make for extremely efficient income streams, I feel it’s important to maintain some sobriety in this area. It’s really easy to get swept up in the tax-free income benefits but I have an instinctive wariness about legislation which is so generous.”
He adds: “Quite simply, there is nothing to stop future governments winding back some or all of the benefits and I question the apparent trend of people putting most or all of their retirement capital into superannuation simply due to the 1 July changes. Keeping some capital outside superannuation protects it from, for example, future legislation changes which restrict or cut-off access to the capital. It just provides more choice and more flexibility.”