What to do with super before June 30
The May Federal Budget announcement revealed a number of proposed changes to superannuation. It included the introduction of a $1.6 million pension transfer limit and $500,000 lifetime non-concessional contributions limit, the increase of tax payable inside transition-to-retirement pension accounts and the reduction of concessional contribution limits. So not surprisingly, the number one question being asked by super fund members is: ‘what do I need to do before June 30?’ and there are five tactical measures that you should consider now.
1. Review your finances as a couple
If one of you has a lower overall super balance then consider spouse contribution splitting, which involves concessional contributions (employer, salary sacrifice or self-employed) made in the current and previous financial years. The good news is that you don’t need to revisit old contribution records to implement a spouse contribution split as it does not count towards the receiver’s concessional or non-concessional contribution limits. You may be able to move around $25,000 or $35,000 for each year, and to take advantage of concessional contributions made in the 2014-15 financial year you must make the transfer before 30 June 2016. This may help keep superannuation balances more even, and may provide more room to grow your super (especially if the proposed $1.6 million pension transfer limit is legislated). If the spouse receiving the split is a lot younger or on a very high income it may not be worthwhile. If either spouse receives the age pension it is generally not advisable to undertake this strategy.
2. Defer non-concessional contributions
Over the longer term, amounts over $1.6 million could be directed to one spouse via a non-concessional contribution, however due to the $500,000 lifetime limit that was proposed to commence on 3 May 2016, it is wise to be extremely cautious about this option. If you are planning a non-concessional contribution prior to 30 June 2016, it may be appropriate to defer this for 12 months. Some additional personal tax may be payable while monies are held outside of super, but this is likely to be lower than the penalty imposed if the contribution is later deemed an excess payment. There is also a lot of administration involved in dealing with excess contributions. Please be aware that excess contributions made after 3 May 2016 are subject to penalties and generally must be removed from super.
If you do have a special circumstance (for example, you reached age 65 this financial year) and making a non-concessional contribution is important to your situation, unfortunately it is likely to be a difficult and costly process to work through so personal financial advice is highly recommended. For those in a defined benefit super fund, post-tax member contributions also count towards the lifetime limit, but as stopping contributions is likely to reduce the final entitlement it may not be worthwhile to stop.
3. Apportion unallocated withdrawals
Any unallocated withdrawals made from a self managed super fund this financial year above the minimum pension requirement must be allocated between applicable members before 30 June 2016. For example, if you have a minimum drawdown of $50,000 but $150,000 was drawn, the allocation of the excess $100,000 withdrawal must occur before 30 June 2016. Before finalising instructions it may be beneficial to consider how balances are structured between each member.
4. Don't stop pensions just yet
Super is still very attractive, particularly the superannuation pension phase. Changing your arrangements now (i.e. stopping a transition-to-retirement or account-based pension) could result in lost opportunities, administrative hassle and unnecessary stress. Even if the proposals come in, account-based pensions and transition-to retirement pensions keep their favourable tax-exempt status right up until 30 June 2017. That is another year of tax free earnings foregone if you stop the account now. Please be aware that stopping a pension midway through the financial year requires a pro-rata payment up until the day the pension was in operation. For pre-retirees with minimal or no room left on contribution limits who are worried about preserving capital, stopping pensions may be a longer term decision. However doing so without working through the implications on existing strategies, the other changes announced in the budget, or understanding if any legislative exemptions may be granted is risky.
5. Only make minimum withdrawals from super and defer big changes
The proposed changes mean it is likely to be harder to get funds into the super environment, so it is important to consider when and why you take money out of super. Until a full review of the implications of these changes occurs, if you are considering an extra withdrawal over the coming year, it could be beneficial to consider other sources. This might be temporary only and once you are comfortable that the proposals will not impact you, then you may continue with your previous arrangements. However, for those super members who expect to have difficulty getting the amounts they planned into the super environment, taking extra out now might compound the problems.
There is still plenty of time to work through these five tactical measures to help keep your super in the best shape for the future if the proposed changes are legislated. By taking careful action now, you can make the most of existing rules and continue to plan strategically for your retirement.