They're finally here - the passage through Parliament this week of the most significant superannuation reforms in a decade means Australians can begin deciphering with certainty what the changes mean and what they need to do about them.
The raft of new rules will make the retirement savings system far more complicated and may require substantial changes. But, on the upside, at last there is certainty surrounding the super rules for the first time since well before the May budget.
"Having some certainty is well overdue and will help people understand what they need to do," says Nerida Cole, managing director at Dixon Advisory.
Further, the changes don't come into effect for another seven months.
"Super is complicated. Now it is even more complicated," says Claire Mackay of Quantum Financial. "The rules are substantially different. Seven months is a short period of time, but it is enough time to prepare. It does not need to be stressful and it will be worth the time and effort." She urges savers not to leave preparations until the last minute.
Some of the key changes are the imposition of a $1.6 million ceiling on the amount of money that can be held in tax-free super pensions, lowering the annual pre-tax contributions limit to $25,000 from $30,000 or $35,000 depending on a superannuant's age and the imposition of a 15 per cent earnings tax on transition to retirement (TTR) pensions. There will be no restrictions on receiving tax deductions for personal contributions and from July 2018 savers will be able to make catch-up contributions on a rolling five-year basis for unused concessional contributions.
In one of the most hotly debated changes, the annual limit on after-tax contributions will be lowered to $100,000 from $180,000, but will only be allowed in cases where the saver's super account balance is less than $1.6 million.
Where to start
Bryan Ashenden, senior manager of advice strategies at BT Financial Group, suggests starting with contributions – more precisely, maximising the current contributions rules.
"The most critical area is to focus on contributions this financial year. That has to be your starting point," says Ashenden.
Under the current rules, savers can inject $180,000 of post-tax money into super this year, or they can utilise the so-called bring-forward rule and pump in up to $540,000. A couple can inject up to $1.08 million, although they will not be allowed to make any further non-concessional contributions for the following two years.
If savers do not have the money to hand, Ashenden says they could consider a sale of assets outside super, although this may trigger capital gains tax. They could also consider in specie transfers of shares or property, such as a business premise into a self-managed super fund (SMSF).
Cole recommends that savers take a long-term view of their super plans, given the reduction in the post-tax contributions limits from next year.
"If you are planning to put money into super in future years, maybe you need to bring that forward. Could you shuffle [your assets] around a bit?" she says. One example is to take money out of an offset account attached to an investment loan and inject it into super savings.
Pros and cons of borrowing
Borrowing money to put into super is another option, but advisers voice concerns about the strategy. Borrowers face the potential for interest rate rises in the next few years, the interest is not tax-deductible and, as Ashenden points out, fund members would have to put up personal assets as collateral because super fund assets are not allowed to be used as security.
In addition, says Liam Shorte of Verante Financial Planning, savers approaching retirement should be particularly cautious of taking out loans. "You don't want to be taking debt into retirement," says Shorte.
Cole says borrowing money is only advisable if it is a short-term proposition. An investor who is waiting for the sale of a property to settle could take out a loan to get the money into super, but even then would need a back-up plan if the settlement fell through.
Shorte has some useful advice for those injecting large sums into super between now and July next year, particularly if the money is going into a retail or industry fund. Don't put it all in the intended investment option at once, he says. Rather, superannuants should put the money into cash and drip feed it into other investment options, such as a balanced strategy, over time. This will minimise the investment risk.
"If you are putting in $540,000, you could drip feed it into other investment options over two years. The aim is to try to minimise risk at every step along the way," says Shorte.
Ashenden says the manner in which money is allocated to investment options inside super should reflect the saver's approach to risk, agreeing that if investors are worried about market gyrations, tipping money into an investment over a period of time makes sense.
Then there are concessional contributions to consider. Ideally, savers should exploit the current contributions limits where possible. The self-employed have more flexibility because they are able to make personal contributions at the end of the financial year and claim a tax deduction. In the case of salaried workers, the sooner they contact the payroll department and arrange to raise their salary-sacrifice contributions, the easier. "Take that action now. Don't wait any longer," says Ashenden.
Salaried workers who pump more into super this year will need to remind their payroll departments to lower their salary sacrifice levels in 2016-17 in accordance with the lower contributions caps. As Mackay notes: "Payroll departments in most companies don't take responsibility for how much you put into super."
Re-balancing
The next step is for savers who are members of a couple to ensure that their balances are as even as possible.
This is particularly important for couples where one of the partners has a balance of more than $1.6 million, or approaching $1.6 million, as this is the maximum sum of money permitted to be held in a tax-free private pension. Couples who are still saving can use contribution-splitting strategies to even up their balances. Couples who are in the pension phase and able to withdraw money from super should take money out of the account with the higher balance and inject it in the account with the lower balance, say the experts. "It's about re-balancing your accounts. You've got to think: what does my pension position look like?" says Ashenden.
A member of a couple who is putting extra money into their super account must abide by rules. If they are under 65, they are able to do so with no restrictions, as long as they do not breach the contributions caps. If they are aged between 65 and 74, they need to meet the so-called work test. In other words, they must have worked for at least 40 hours over 30 consecutive days in the financial year in which the contribution is made. Anyone aged 75 or over cannot make after-tax contributions.
Savers with more than $1.6 million in pension mode will need to think about which assets they leave in the pension and which assets they place in an accumulation account – and, indeed, consider whether some money should be removed from super altogether and put in personal names.
Shorte argues that the most logical course of action is to hold high growth assets, such as international shares and property, in the pension, where there is no limit on how much the value of the pension can grow beyond $1.6 million. He says cash and term deposits should be held in the accumulation account.
Ashenden says that investors with a lower appetite for risk might want to take the reverse action on the grounds that if the value of assets in the pension fall from $1.6 million to, say, $1.4 million, there is no opportunity to top up. "If you put defensive assets in the accumulation account, it will be more capital stable. There will be a greater chance that your pension will last," Ashenden says.
SMSF trustees need to understand that while they are able nominally to separate their assets between the pension and accumulation accounts for asset allocation purposes, when it comes to calculating the tax payable, the tax will be calculated across all the assets held in an individual member's accounts on a proportionate basis.
This is because under the legislation, if a member has more than $1.6 million of assets, all the assets will be treated on an unsegregated basis for tax purposes.
Ignore capital gains scare
Most advisers argue that investors who will be forced to shift money out of an account-based pension into an accumulation account shouldn't be overly worried about being slapped with capital gains tax on the portion of assets held in the accumulation phase.
This is because the cost base of the assets held in the pension will be re-set at any date between November 9 and June 30, rather than from the date of purchase. This only applies to self-managed funds and means that the tax-free capital gains that have been accumulated to date won't be touched.
It is assumed that most trustees will re-set the cost base on June 30, 2017 to coincide with the end-of-year audit. But more canny investors might choose to use a date before then, when asset prices are higher. The downside is that an actuarial certificate will be required.
Cole suggests that retirees who are just over the $1.6 million super pension cap might consider taking the excess out of super altogether, for the sake of convenience. "It may be more of a hassle to have two accounts," she says.
Even if a superannuant has considerably more than $1.6 million in an account-based pension, it might be worth removing the excess from super and placing it in the saver's personal name to make use of the personal tax-free income threshold and the senior's and pensioner's tax offset (SAPTO). The tax-free income threshold is $18,200 a year and under the SAPTO, assuming that certain criteria are met, a couple can earn $58,000 a year tax-free, while a single person can earn $32,000 a year without paying tax.
That said, withdrawing money from super comes with risks. If the SAPTO thresholds are changed and retirees want to move money back into super, they may no longer be allowed to. "It may be difficult to get money back into super," warns Cole.
TTR pensions
Individuals operating a TTR pension will have to consider if it is still right for them to do so, given that from July next year the earnings will be taxed at 15 per cent, rather than being tax-free.
Investors – particularly those over the age of 65 – who are using the strategy to build a pot of non-deductible contributions for estate-planning purposes might find the strategy far less attractive. In any case, investors with more than $1.6 million in super won't be able to use a TTR pension as a so-called re-contribution strategy because they will be prevented from making after-tax contributions.
However, such an arrangement will still make sense for people who want to be able to make extra salary-sacrificed contributions and need the extra cash flow from the TTR pension to compensate.
Investors over 60 should consider converting their TTR strategy to a full pension to retain their pension money in a tax-free vehicle. They will need to meet a "condition of release", one of which is terminating employment. As Shorte notes, this could involve quitting a part-time job. A a second part-time job could be retained if desired.
