Likely super changes: A user’s guide

Transition to retirement provisions could be limited and contribution caps could be overhauled.

Summary: A number of possible super changes are on the Government’s radar: limiting access to transition to retirement provisions, abolishing anti-detriment payments and caps on super contributions. Changes to the tax payable on super contributions are also being considered.

Key take-out: The most significant possible change would be the end of transition to retirement income streams, which were a great way to save tax and get more money into superannuation ahead of retirement.

Key beneficiaries: General investors. Category: Superannuation.

With a change of prime minister, changes to super are suddenly on the table. Prime Minister Malcolm Turnbull and Treasurer Scott Morrison are reviewing the super system and are open to taking action. 

We would remind Eureka Report subscribers of three important facts here:

1. All reports to date of change are hearsay, however it’s clear that the government is “leaking” key suggestions on superannuation reform to test public reaction.

2. The  reports to date concern the “accumulation” phase of superannuation where people are still working and saving – there are no reports of any changes to the pension phase of super.

3. Investors will still have time to access existing arrangements or make tailored superannuation plans... but it is important to know the changes that are now planned. 

The key changes appear to be: getting rid of (or substantially reforming) “transition to retirement” income streams, changing the tax paid on superannuation contributions, putting a lifetime cap on non-concessional superannuation contributions (the ones we tend to know as personal contributions, or after tax contributions), and abolishing anti-detriment payments.  

Transition to retirement income streams

Transition to retirement income streams allow someone to draw down a superannuation pension while they are working once they have reached their preservation age. What this almost always means is that people at their preservation age will take a tax free superannuation pension, while reducing their income tax by aggressively salary sacrificing to superannuation. It is a lucrative strategy as workers save income tax, and the superannuation fund paying the pension is taxed at a 0 per cent tax rate, rather than the 15 per cent tax rate faced by an accumulation superannuation fund.

The strategy has been around for 10 years now. For more details on how it works, see A pension trip worth taking (July 29, 2013). 

If the Government were to change or limit access to the transition to retirement provisions, investors could consider two options.

First, if you have reached your preservation age (55 years old for those born before July 1, 1960), I would strongly suggest looking into starting a transition to retirement income stream immediately. It is a powerful strategy to have access to, and given the Government tendency to “grandfather” existing superannuation arrangements when making changes, I think that it makes sense to try and get one in place in anticipation of any Government changes. The strategy becomes most powerful after the age of 60 but most people will find benefits prior to then, including that the assets of the superannuation fund are taxed at a lower rate.

Second, the lack of access to a transition to retirement income strategy will reduce the ability of people to aggressively “top up” their superannuation close to retirement. This means that we should be more cautious about the projections that we make for our superannuation balance at retirement, and perhaps get to work on making additional contributions earlier. Certainly, salaried workers should be thinking very hard about maximising salary sacrifice - the current limits are $30,000 up to the age of 50 and $35,000 after the age of 50. 

Superannuation contributions 

The Government is considering a plan to tax super contributions at 20 percentage points below a saver’s marginal tax rate, instead of taxing all super contributions at 15 per cent (30 per cent for those earning more than $300,000).

This would mean someone earning more than $180,000, who currently pays 15 per cent tax on super contributions, would instead pay 27 per cent.

By contrast, someone earning $80,000, who currently pays 15 per cent on contributions, should pay only 12.5 per cent under the new plan.  

Lifetime cap on non-concessional superannuation contributions 

For the 2015-16 financial year, the limit on non-concessional superannuation contributions is $180,000 per year. This means that in a 30 year period prior to retirement, someone could potentially put $5.4m into the low tax environment of superannuation – along with their concessional contributions and the investment earnings of the superannuation fund.

Treasury has reportedly rejected suggestions for a lifetime cap on super contributions, but is still considering the idea of some other cap on contributions.

If the $180,000 per year limit were removed, along with the ability to bring forward three years of contributions ($540,000), it is unlikely that this change would have a huge impact on your “average” investor. Let’s face it, if the biggest problem someone has got is that they can’t keep putting $180,000 of their own money into superannuation each year over an extended period because there is a lifetime cap, life is not too bad. 

Anti-detriment payments

An anti-detriment payment is a refund of tax paid on concessional superannuation contributions. It effectively increases the superannuation death benefit of a member. The anti-detriment payment is claimed back by the superannuation fund as a deduction through the tax system (hence the cost to Government of these payments).

Not all superannuation funds make anti-detriment payments. Indeed, it is reasonably difficult for a self-managed super fund to make an anti-detriment payment. 

But the Government sees the payments as a loophole costing the Budget around $100 million a year and is likely to abolish them.

Over the past decade or so, it seems there has been quite a focus by the financial services industry on recommending funds that make anti-detriment payments, and rightly so. If these payments no longer exist, people who chose a fund with this as a key criterion might want to reconsider. For example, if someone had decided not to go with a self-managed super fund because of the challenges in making an anti-detriment payment, it might be time to review that decision.

Conclusion

To my mind if these changes were to happen, the most significant for people would be the end of transition to retirement income streams – which were a great way to save tax and get more money into superannuation in the lead up to retirement. The other two changes are well worth being aware of, and less likely to impact too many people.