Boomers with plans to salary sacrifice $50,000 into their super have been dealt a blow by the government plan to halve that amount for over-50s. The higher amount was in recognition that they have not had the benefit of compulsory super over their whole working lives. As it is, most have gone backwards financially, being hit by the worst investment returns in decades.
It is only once the kids have left home and the house is paid off that there is enough spare cash to put towards retirement. From July 1, there will be a single cap for everyone on how much they can salary sacrifice into super. It will be $25,000 a year, the same as under-50-year olds have now. The cap includes the 9 per cent compulsory super made by employers. That means someone on $100,000 a year can only sacrifice up to $16,000, while someone earning $150,000 can sacrifice just $11,500.
Before the budget, the government said it would allow the $50,000 cap to remain for over-50s with less than $500,000 in super, but that has been deferred for two years. That's a blow, particularly for those with broken work patterns - mostly women - with low account balances. The tax savings from sacrificing salary into super are still good. From July 1, the tax savings on salary sacrifice into super is 17.5 per cent on those earning between $37,001 and $80,000 (most taxpayers) and 22 per cent for those earning between $80,001 to $180,000. It's the low cap that's the problem.
Many boomers will be seeking alternative ways to invest for their retirement after maximising before-tax contributions from salary to super. They are likely to want to turn to investments that have the potential for capital growth, rather than income. Capital gains from investment held for at least a year are taxed at half the investor's marginal income-tax rate.
The challenge will be to invest carefully and diversify properly. That is especially true for those tempted to use the equity in their house to borrow to invest.
Just as gearing magnifies returns, it also magnifies losses. For good reasons, super funds are not allowed to borrow to invest, although it is allowed - with tight restrictions - inside self-managed super funds.