Friday 5 April 2013

Superannuation changes need careful consideration

Some detail has been released about the planned changes to the Australian superannuation system that are likely to be introduced in the May budget. Nothing is definite until the 'fine print' comes out with the Budget, and there may be some additional tweaking for political reasons over the coming weeks, as I'm sure some 'unforeseen consequences' will emerge as superannuation accountants consider these changes. Not to mention that the changes may be rolled back, or at least modified, if the coalition wins the next federal election a few months after budget night (after brings down there own Budget before these changes are due to kick in on July 1 2014!).

Meanwhile, the broad outline of the changes don't appear to dire for us - I'll be greatly surprises to have more than $2m balance ever in my SMSF, so using the assumed 5% earnings rate during pension phase, the proposed 15% tax on earnings above the first $100Kpa during pension mode are unlikely to impact me. A breakout in inflation (say, above 10%, which happened in the 80s) might boost both my SMSF balance and earnings to the level where these changes bite, but I expect the thresholds would be occasionally indexed with inflation, so even that impact is unlikely. Given the continual fiddling with the superannuation system, legislative risk is a much greater concern.

There is also the possibility for shifting some of my contributions into DW's SMSF account, as she has a much lower balance than myself, so is never likely to be impacted by the proposed Budget changes. However, as DW currently expects me to continue to pay for all the essentials during retirement, and seems to view her SMSF as a 'windfall' lump sum upon reaching retirement age, rather than as a source of pension income, I'm loath to shift my contributions into her account. Having any say in how she spends 'her' retirement income stream (or lump sum) would be extremely contentious, so I'd rather not open that can of worms!

One positive move being suggested is to partially roll-back the changes to concessionally-taxed contributions threshold Labor introduced in order to fund pink-bats, school halls and the other emergency spending measures they introduced post-GFC. Rather than re-instate the $50K threshold for over-50 workers that they scrapped, Labor is proposing a modest boost in the threshold from $25K to $35K for workers aged over 60 (from 1 July this year), and extend that concession to over-50 workers from 2014 (although promising any changes past the Nov election is pure fantasy). At my current age (51) the $25K limit on concessionally taxed contributions (instead of $50K) *would* have had a major impact on my retirement savings plan - 'fortunately' the impact of the GFC on my investments held outside of super has meant that I can't actually *afford* to salary sacrifice enough to exceed the current $25K cap by much, even if I wanted to. So a slight increase to $35K from age 52 onwards would probably be adequate in my case - I can't see any pay-rise of more than $10Kpa coming my way! (I haven't had a pay rise above the cpi for the past decade or so!). Perhaps if we sell our investment property and can pay off our non-tax-deductible home mortgage, I can redirect some of my marginally taxed 'tax-home' pay into salary sacrifice contributions. However, while a saving of 15% tax on $10Kpa would be very nice, it is hardly going to make much difference to my retirement lifestyle. Putting this tax saving into my SMSF until I retire at 65 would, at 5% earnings rate during retirement, provide an extra $18.75 per week income during retirement. Every little bit counts, I suppose.

In reality, the prospect of further changes to how superannuation is taxed during the accumulation and pension phases, makes any detailed planning a rather futile exercise. And with Labor apparently viewing the trillion-dollar pool of private retirement savings as a huge 'honey pot' waiting to be taxed (in order to fund their wealth redistribution and social re-engineering goals), unless the coalition has such a massive land-slide victory in the Nov election that there is some prospect of a multi-decade period of conservative government (like the period from 1945 to 1980), trying to optimise retirement savings strategies based on prevailing legislation is pointless.

While I have little sympathy for the estimated 16,000 investors that $2m+ balances in the super account (after all, only the income above $100Kpa will be taxed at 15%, so the real impact will be minimal unless your super balance is considerably MORE than $2m), the change is an unfortunate example of retrospectivity, since it will apply to the earnings of funds accumulated within super prior to the introduction of this legislation.

Subscribe to Enough Wealth. Copyright 2006-2013

No comments: