A bust for boomers

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.

By InvestSMART · 16 May 2012

By InvestSMART ·
16 May 2012

Comments

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.

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

What is the new salary sacrifice cap into superannuation from July 1?

From July 1 there will be a single annual salary sacrifice cap of $25,000 for everyone. That cap includes the compulsory 9% employer super contribution, so total concessional contributions to super cannot exceed $25,000 a year.

How does the $25,000 cap affect how much I can personally salary sacrifice into super?

Because the $25,000 cap counts employer contributions, the amount you can salary sacrifice depends on your salary. For example, someone on $100,000 a year—who gets about $9,000 from their employer—can only salary sacrifice around $16,000, while someone earning $150,000 can only sacrifice about $11,500.

Who is most affected by the reduction of the over‑50 salary sacrifice concession?

Older Australians (boomers) planning to put larger amounts into super are most affected. The change hits especially those with broken work patterns—mostly women—and people with low super balances who were expecting to use a $50,000 cap. A previously announced measure to keep $50,000 for over‑50s with less than $500,000 in super has been deferred for two years.

Are there still tax savings from salary sacrificing into super under the new rules?

Yes — salary sacrifice into super still provides tax advantages. From July 1, the tax on concessional contributions will effectively be 17.5% for people earning between $37,001 and $80,000, and 22% for those earning $80,001 to $180,000. The issue for many is the lower cap, not the concessional tax treatment.

If I hit the new super cap, what alternative investment options should I consider for retirement?

Many people who can’t contribute more to super will look to investments that aim for capital growth rather than income. Capital gains on assets held at least a year are taxed at half your marginal income tax rate, which can be tax‑efficient. Whatever you choose, the article emphasises investing carefully and maintaining proper diversification.

Can I use the equity in my house or borrow to invest to boost retirement savings?

You can use home equity or borrow to invest, but gearing magnifies both gains and losses, so it increases risk. The article warns investors to be cautious about borrowing to invest and to ensure they diversify properly before taking on leverage.

Are super funds allowed to borrow to invest on behalf of members?

In general, super funds are not allowed to borrow to invest. The exception is self‑managed super funds (SMSFs), where borrowing is permitted but subject to tight restrictions. That restriction exists because gearing inside super increases risk to retirement savings.

How should everyday investors approach retirement investing after the cap reduction?

The article suggests maxing out allowable before‑tax contributions where possible, then looking at diversified, growth‑oriented investments outside super if you need to build savings. Keep risk in check, avoid over‑gearing, and remember that broken work patterns and low balances can require different strategies—so plan with your personal situation in mind.