Put More in Super Earlier Money Matters Monday 20th November 2017
The biggest changes to superannuation rules for many years came into force on 1st July. What have the effects been and what should investors be doing as a consequence?
Tax deductible contributions
The most significant change, affecting many people is the new lower limit on concessional or tax deductible contributions. These are employer super guarantee contributions plus salary sacrifice amounts. Previously $100,000 per year, then $50,000, then $35,000 … this time the limit was cut to just $25,000.
And the consequences of this can be costly. Because if for example, a person arranged $25,000 of contributions every single year of a forty year working career they would have plenty of super for a comfortable retirement, ….But life isn’t this straight forward and this isn’t the usual pattern. Most people, at some point, become focused on buying a home, and raising children.
During these times, retirement funding is a low priority. It’s only when promotions and pay rises come, and mortgage and family costs are under control, that they start to boost their super contributions.
With a $25,000 annual limit, ‘catching up’ might not be possible, especially for people over age fifty who have not had compulsory employer super all their careers.
This new rule means people need to consider contributing more to super earlier, by salary sacrifice, because they may not be allowed to put enough in late in their careers to reach their desired retirement goal.
For example if your annual salary is $80,000, employer contributions will be nearly $8,000. This means you can sacrifice up to $17,000 of pre-tax pay, or $320 per week. If you can afford to save this, then getting it into super at an early age is important.
The limit on non-concessional or non-tax deductible contributions has also been cut, to $100,000. This isn’t usually a problem for most people, but the same principle of needing to get more money into super applies.
Large sums of money like an inheritance or the proceeds of sale of a property or business don’t come around that often, so maximising these opportunities to contribute some to your super fund is important.
As of July, there’s also a new $1.6 million limit on retirement pensions. If this affects you, then you’ll need to decide whether to leave the excess in an accumulation account paying 15 per cent tax or withdraw it from super. The decision will depend on their marginal tax rate.
There is a new rule allowing anyone, including employees, to make contributions and claim a tax deduction. There is also a new, much more generous spouse contribution rule. These will suit many people and will come into focus much more towards the end of the current financial year.
If you need help understanding how the new superannuation rules affect you, then please contact us.
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