Outlook for super less appealing

Whoever wins the impending election, one thing is certain: superannuation will be a much less attractive future savings vehicle for higher-income earners.

As enunciated in the budget and yet to be enacted into legislation, the government plans to dramatically reduce the maximum concessional cap to $25,000 a year (cumulative for five years) and limit the lifetime non-concessional cap to $500,000.

The sting in this tail is that non-concessional contributions made since July 1, 2007 will lower the future allowable contributions. This immediately lessens the benefit of making large nonconcessional contributions before the proposed changes apply.

Similarly, while taxpayers are able to take advantage of the current annual concessional contributions caps of $35,000 (for over 50s) and $30,000 (for under 50s) until July 1, 2017, there's a further deterrent. From July 1, 2017, the government plans to limit the maximum amount that can be invested in a tax-free pension fund to $1.6 million.

While the government argues this limit will affect only a small number of retirees, the harsh reality is that many existing retirees will be affected by this change. The balance of their money will have to be switched to an accumulated account subject to 15 per cent tax on earnings, or withdrawn from the fund.

Labor's proposal is to tax annual earnings on pension funds in excess of $75,000 annually at 15 per cent.

Whether or not $1.6 million is sufficient to generate an annual income of $75,000 is questionable, requiring an annual return of 4.7 per cent in today's low interest rate environment.

Clearly, accumulating large amounts in superannuation will be a much more difficult strategy and, unlike with previous budget changes, there are limited opportunities to protect personal positions before the legislation is enacted.

For higher-income taxpayers earning more than $250,000 annually who will be subject to a 30 per cent contributions tax, superannuation is a far less attractive savings option.

At a personal level, particularly at younger and middle ages, other investment options including paying off the family home or negative gearing investments will be more attractive strategies.

Apart from the proposed new limits on the size of pension funds, the disadvantages of having money tied up in super is the requirement not to touch the money until age 56 or later retirement. The $1.6 million proposed limit on pension fund accounts also increases the need
to ensure that account balances are split equally between partners.

Whichever party's superannuation policies are enacted after the election, the barriers to a comfortable retirement will have been raised.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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