Super: It's time to move on

I hate to be the crusher of dreams, the strangler of wishful thinking. But I think it's about time to snuff out some truly false hope.

Today, I think I need to do that. To help some SMSF trustees to move on.

Superannuation as we have known it – with high contribution allowances and uncapped pension accounts – is dead. Stone, motherless, dead.

There is no pulse. Superannuation will not, somehow, receive a “Packer Whacker” and return to its previous glory/generosity.

You may, officially, begin to reminisce about superannuation's "good ol' days", the sorts of stories that start with sentences such as "back in my day", and "when I was young".

Goneski. It's not coming back. And, I'm sorry, but the likelihood of Mack-truck sized loopholes in the new legislation are akin to your chances of flipping 15 consecutive heads at a two-up school.

I say this because some truly starry-eyed hope is still being held.

Such as one reader who is hoping that the transfer to pension cap of $1.6 million will be based on purchase prices. So, if you bought $1.6m of BHP shares in the 70s, that are worth, say, $10m or $20m now, you would be still under the cap?

It won't be. The transfer to pension cap will, I have no doubt, be based on the market value of your assets on June 30, 2017.

Or that the government will allow couples to "average" their super balances, to go under the $1.6m limit each. That is, if one has $2.5m in super and the other has $500,000, then they can average it out, because they have a total of less than $3.2m ($1.6m each).

Nope. Balances will be for individuals. And individuals will be able to have no more than $1.6m as a tax-free pension fund. Unless you can use the existing rules, or have used them in the past (see my column on couples' super strategies), then bad luck.

The false hopes are coming from a misunderstanding. And that is that the government will come to the realisation that what they have done is, somehow, "unfair".

You need to understand that this is not really coming from "the government". It's not being driven by Malcolm Turnbull, or Scott Morrison. This is being driven by the Department of Treasury.

Superannuation has become big business. Probably bigger than Paul Keating thought it would become when he did the deal to make it compulsory in the early 90s.

In order to give it a solid start, the ability to get money into super was deliberately left very loose. It got tightened by Peter Costello in 2007, then further tightened by Kevin Rudd, then Julia Gillard. And now, most recently, by Scott Morrison.

All restrictions have, however, been driven by Treasury and their concern about this ever-growing Mt Everest of tax-free investments.

Treasury has been arguing this for some time. It is fine that a pile of the nation's money was sitting in tax-advantage states. But not that it had become a way for individuals to create monstrous tax-free investment trusts.

I've been trying to build one. And been cut off at the knees, in my relative youth of mid 40s.

Any time that there is change, there will be winners and losers, at least in a relative sense. The government (or Treasury, really), now apparently backed by the Opposition, is saying a few things.

1. That $1.6m is a generous amount to have tax-free in a pension fund, on which no tax will be paid, ever.
2. That if you have any more than that, you can leave it in super and pay a maximum of 15 per cent tax. Which is better than up to 49 per cent if you pull it out of super.
3. In order to build your balance you can put in $25,000 as concessional contributions a year, or $100,000 a year as non-concessional contributions.

At its crux, it's that simple. And with the support of most in politics now, it's unlikely to change much before implementation.

It's not going to stop people, or the superannuation industry, trying or lobbying though. The SMSF Association joined forces with actuaries Rice Warner to produce a report that says that the over-50s should have higher CC limits, because few start making major contributions until they are in their mid-50s.

"The research confirms what the (SMSF) Association has long been telling policy makers: that there is a sharp difference between compulsory and voluntary contributions to superannuation – the former increase gradually over time while the latter jump dramatically in the years leading to retirement," said the association's chief executive, Andrea Slattery.

"This research graphically shows why people aged 50 and over need to have a more generous contribution cap than the $25,000 that will apply from 1 July 2017."

But Slattery knows that she's avoiding the real point. The government wants you to change your habits. Instead of shovelling in money as you approach retirement – which is as much about saving tax as it is putting away for retirement – it wants you to start making the sacrifice earlier, even if that is at the expense of paying off the mortgage faster.

Saving for retirement is something that should happen throughout your working life. Not just at the end bit, to get bigger tax deductions.

And it is a sacrifice. Making the decision to not take salary/income in your 30s and 40s (when you could use that money to pay down the mortgage or school fees) and put it into superannuation instead, is a long-term sacrifice. If you're doing that at age 40, you are kissing goodbye to that money for 20-25 years at a minimum.

But, if you want to build your tax-free super pot to $1.6m for retirement, then that is what the government wants you to do. It is the behaviour that it is encouraging.

Some changes to the currently agreed/proposed rules, are possible, even likely. But anyone hoping that we are going to see the new rules, or any major part of the new rules, abandoned, needs to wake up.

The information contained in this column should be treated as general advice only. It has not taken anyone's specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is a licensed financial advisor, a mortgage broker and an expert on self-managed super funds. He is a regular contributor to Eureka Report. To contact Bruce, please click here.