We summarise the key issues for our clients in their mid 50s to mid 60s following the material super changes announced in Budget 2016.
Note: This is general advice and takes no account of your personal circumstances. Please contact your Quantum Financial advisor for personal advice.
Typically at Quantum Financial our pre-retirees clients are aged in their mid 50s to mid 60s who are doctors or lawyers or business established in private practice; company head or divisional directors; financially fabulous women; and business owners planning to exit their business. If this is you, this is what Budget 2016 means for you.
The changes that potentially impact me
- The income threshold for when additional super contribution tax applies (30% on contributions instead of standard 15%) drops from $300,000 to $250,000
- Concessional (ie pre-tax) contribution caps fall to $25k from 1 July 2017.
- Concessional (ie pre-tax) contribution caps can be carried forward for 5 years up to $125k from 1 July 2017 if your total super balance is less than $500k.
- Non-concessional (ie post-tax) contribution caps set at $500k lifetime cap (including any non-concessional contributions made in the period 1 July 2016 to now)
- Transition to retirement (TTR) pension strategies may no longer be as beneficial from 1 July 2017.
- Tax free pension balances are now capped at $1.6m per member
What do I need to know?
1. You can no long delay planning your retirement until your last few years of work
Under the old rules, if you had the funds in the last 5 years of your working life up to age 64 you could easily contribute $1m from after tax money to your super and up to $140k in pre-tax money. If you delayed planning, there was always the time and opportunity to catch up. Under the new super rules, you can’t procrastinate. The earlier you start contributing the more that you will be able to fund your dream retirement.
2. You need to completely reassess your retirement planning strategy
While there may only be a few urgent things that need to be done before end of financial year 30 June 2016, for clients in the age bracket 55 to 65 it is imperative that we reassess your retirement planning strategy ASAP. For our existing clients, this forms part of your ongoing Quantum Financial service package.
Under the proposed super rules your contribution limits have been drastically reduced and the benefit of a Transition to Retirement Strategy may be marginal as we approach 1 July 2017. You need to better understand the potential benefits of alternative tax-effective investment vehicles such as trusts and companies and we can advise you on a case-by-case basis.
3. A Transition To Retirement (TTR) strategy may no longer be beneficial from 1 July 2017
From 1 July 2017 the attractiveness of a TTR will be significantly reduced. Until 2017, TTR pensions will be tax free within your super fund while after 1 July 2017 TTR pension will attract the normal super accumulation rates (15% on earnings, 15% on capital growth; except for assets held more than 1 year which attract tax of 10%).
If you have an existing TTR, we will also look to use any ongoing switching advice to refresh the cost base of your investments before 1 July 2017, thereby reducing your potential future tax liability.
If you have an existing TTR strategy or if you are considering implementing one until 30 June 2017, seek advice from your Quantum Financial advisor. We will quantify the benefit and the cost on a case-by-case basis to ensure a TTR is in your best interests.
4. Understand how much of your $500k lifetime you have already used
Currently we are in the period between the new rules being announced, an election, a new Parliament passing the new rules and the new rules coming into effect. Despite this uncertainty, you must continue taking positive actions in your super being mindful of the current and new proposed rules. Before you make a non-concessional contribution, seek advice from your super fund and / or the ATO on how much of your $500k cap you have already used.
Be mindful that this is not as simple as it sounds. Either speak to your Quantum Financial advisor, delegate this task to your tax agent or allocate two frustrating hours on the phone to the ATO.
5. Equalise you and your partner’s super account balances
If you have a partner – As your tax free pension balances are now capped at $1.6m per member at retirement, seek to minimise the tax you will pay in retirement by equalising yours and your partner’s balance via contribution and contribution splitting strategies.
If you don’t have a partner – We believe the new proposed super rules unfairly penalise single clients. Your ability to contribute and take advantage of potential strategies is significantly less than that of couples. Speak to your Quantum Financial advisor to discuss the opportunities available to you.
6. If you are using super to fund expensive life insurance policies, re-evaluate the benefit
As the new rules restrict how much you can contribute to your super, expensive premiums funded in super can eat up a significant portion of your contributions. There can still be cash flow benefits and savings in having your insurance held in your super but ensure the savings are material.
7. Make smart use of your rolling 5 year concessional contribution cap up to $125k
While we will typically advocate regular concessional (ie pre-tax) contributions of up to $25k, there may be situations where you may wish to ‘save up’ your concessional contributions and use up to five of them as a deduction in a single year such as when you sell a property at a capital gain. This strategy will only be appropriate following 1 July 2017 for super balances less than $500k.
8. The 10% rule will no longer apply from 1 July 2017
Under the old super rules (which will apply up to 30 June 2017), the self-employed (or substantially not employed) who were also an employee, could only claim a tax deduction for super contributions when their employee income was less than 10% of their total income. From 1 July 2017 anyone can claim a tax deduction for concessional contributions up to their cap of $25k (including their SG and salary sacrifice contributions).
9. If you have a Defined Benefit Super Scheme, please contact us for strategic advice tailored to your specific situation.
What can I do pre 30 June 2016?
- Make a $35k concessional contribution. This also applies to self employed who meet 10% test.
- If your balance is higher than your spouse, elect to split your concessional contribution to your spouse.
- Check with your super fund or the ATO how much of your $500k lifetime cap you have already used between 2007 and 2016.
- Make appropriate non-concessional contributions mindful of your lifetime cap. If your balance is higher than your spouse, consider making the contribution in your spouse’s name.
What can I do longer term?
- In 2016/17 make a $35k contribution. This applies for the self employed who meet the 10% test.
- If your balance is higher than your spouse’s, split concessional contributions to your spouse.
- Re-evaluate your retirement planning strategy to maximise your superannuation position towards retirement. Review if a Transition to Retirement strategy is appropriate after 1 July 2017 and the attractiveness of alternative investment vehicles (eg trusts, company, etc).
- Have a plan for your Self Managed Super Fund and for alternative investment vehicles.
- Have a plan for your rolling 5 year concessional (ie pre-tax) contribution cap if you are intending on realising capital gains on an investment or property.
If you want to know more, request a copy of our Budget 2016 Survival Guide.