After all the fuss, only a few will feel the big pinch
For most people, the changes to superannuation tax will have little effect, writes John Collett.
At last, the phoney battle on super is over. Now that the government has spelt out how it intends to reform retirement savings, the real political war will begin.
Opposition Leader Tony Abbott has come out with the opening blast, saying reforms are "shades of Cyprus" and a "raid on people".
But putting the political hyperbole to one side, the truth is that new tax imposts announced on Friday will not affect most people. They can go on saving for super in the knowledge that, for them, nothing has changed.
The reforms are targeted at limiting the tax deductions for those with incomes of more than $300,000 a year and those retirees with superannuation account balances of more than $2 million.
The biggest proposed reform is the limit to the tax-free earnings of those with very big superannuation balances once they are in retirement.
Everyone accumulating their super pays a tax on earnings of 15 per cent. Once in retirement, however, there is no tax on earnings.
The government will allow those in retirement to have tax-free earnings on their superannuation investments of up to $100,000 a year. But each dollar of earnings over $100,000 will be taxed at 15 per cent.
According to the government, the change will only affect those in retirement with a super balance of about $2 million or more, or about 16,000 people.
The government has also confirmed that those earning more than $300,000 a year will have to pay 30 per cent contributions tax instead of the 15 per cent paid by everyone else. That will affect about 128,000 people.
The big change that will be of interest to most people is that everyone over 50 (from July 1 next year) will be able to salary sacrifice up to $35,000 a year in super instead of $25,000. The cap is not as generous as it appears because it includes the 9 per cent superannuation guarantee. Someone on $100,000 a year, for example, receives $9000 a year in superannuation guarantee, leaving a real cap of $16,000 a year to make salary sacrifice contributions. With a cap of $35,000, the same person, assuming they're over 50, would be able to make salary sacrifice contributions of $26,000 a year.
It allows those who have some spare money, perhaps after the children have finished school, to build their retirement account balances in the years they have left in the workforce until retirement. The start date for the new higher cap will be brought forward to July 1 this year.
There will also be a streaming of "deemed" rate of earnings for social security benefits, such as the age pension. For calculation of the age pension, a retiree's investments are deemed to have earned a certain rate of interest regardless of the actual interest rates earned.
The deemed earnings are important because the more the retiree is deemed to have earned, the less their age pension payments could be under the social security income test. The deeming rates that are calculated on retirement saving are more generous than deeming rates that apply to assets held outside super.
The government will make uniform the calculation of deeming rates, with the result that many of those drawing a private pension will be reporting a higher deemed income to CentreLink. This could result in a cut in their age pension.
Early indications are there will be no change in pension payments for those with less than about $600,000 or $700,000 in super savings.
InvestSMART FORUM: Come and meet the team
We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free