Summary: The superannuation and pensions landscape is changing in three months. Here's what you really need to know.
Key take-out: The questions still being asked by so many individuals and couples highlights the enormous uncertainty around the incoming superannuation and pension changes.
Key beneficiaries: General investors. Category: Superannuation.
Question: How can I maximise how much money I put into super this financial year?
Answer: Until 30 June, we're still operating under the ‘current’ rules. And those allow for concessional contributions (where someone is claiming a tax deduction for the contribution) of $30,000 for the under-50s and $35,000 for the over-50s.
Concessional contributions (CC) include the Superannuation Guarantee of 9.5 per cent paid by most employers on behalf of employees, plus any amounts that you salary sacrifice. It also includes, for the self-employed, any amounts for which you are going to claim a tax deduction.
For non-concessional contributions (NCC), this year's limit is $180,000. And, for those who are able to, the use of the three-year pull-forward rule, will allow you to put in up to $540,000 in the current financial year.
You need to have been 64 or younger for a part of the financial year to use the pull-forward rules. You also need to check that you haven't tripped the three-year pull-forward rules in recent years, by putting in more than $180,000 in a single year during FY16 or FY15. Check with your adviser or accountant if you're not sure.
Making the most of this year's contribution limits will be important, if you have some extra cash lying around.
Question: How much can I get into super next financial year?
Answer: Both CCs and NCCs are going to be cut from 1 July.
Everyone who is able to make CCs will have the same limit of $25,000 a year. There will be no larger allowance for older Australians.
Anyone who has a salary sacrifice arrangement to get as close as possible to the limits that are available up to 30 June 2017 will need to check and make some adjustments to those agreements with employers.
The fall means that anyone who is earning more than $263,157, and receiving the full 9.5 per cent on that salary in SG contributions, will hit the new $25,000 CC limit. No more salary sacrificing for you.
And NCCs are also being cut – from $180,000 a year to $100,000. That means those who are wanting to put in large amounts of after-tax money will find it increasingly difficult to do so.
For example, trying to contribute large amounts of money after the sale of, say, an investment property, will be more difficult. However, as is the case currently, you can use the three-year pull-forward to put up to $300,000 into super if you satisfy the age restrictions. And so can your spouse (if you're both eligible) – meaning you can get up to $600,000 into super.
But there are further restrictions. If you have more than $1.6 million already in your personal joint super and pension funds, then you aren't able to make any further non-concessional contributions. And if you have more than $1.4 million in super, you face some restrictions in using the pull-forward rules. For more information on these restrictions, see this column.
Question: With the new restrictions, should I borrow to get money into super before 30 June?
Answer: In some limited circumstances, this might be a good idea, yes.
Normally, the answer to the general question of borrowing money to put into super is a ‘no’. It usually doesn't make sense, unless it is short-term borrowing and you know you'll be able to pay the loan back quickly.
The reason for that is that the interest costs on that borrowed money will not be a tax deduction. If you're borrowing $500,000 to get money into super, but you're not going to be able to pay it back in the short term and the interest cost isn't a tax deduction, then the hurdle for what that money needs to earn in super to beat the interest costs is that little bit higher. For more on this, see this column.
The last time this was a big consideration was a decade ago, in the lead up to 30 June 2007, when there was a one-off opportunity to put $1 million into super. The big difference then was interest rates were 7-8 per cent.
If you want to make a big contribution to super to make the most of the $540,000 NCC limit (or double that for a couple) and are highly confident you can pay the money back fairly quickly, then it can make sense. Get advice before you do it.
Question: I have a TTR pension. What happens to them on 1 July?
Answer: This will be the first time in Australian history that a pension fund is taxed.
Transition to retirement (TTR) pensions have, until 30 June, been taxed the same as all pension funds. That is, the assets supporting a pension are not taxed on income or capital gains.
However, that changes on 1 July. TTR pension funds themselves will become subject to the 15 per cent income tax rate (or effectively 10 per cent for capital gains, after the one-third discount is applied)
So the old, wonderful, merry-go-round of pulling a TTR pension while maximising salary sacrifice contributions is a strategy that has taken a big hit with the new changes. It can still work for people in the right circumstances, but generally, not for those with larger pension funds.
The income will still be taxed the same on the way out. If you are over 60, then you won't pay tax on the income that you receive as a pension from your TTR pension.
But this strategy will require a rethink and possibly some reworkings with your financial adviser to see if it still makes sense in your situation.
Most importantly, if you have an opportunity to switch your TTR to an account-based pension (ABP), then you should do so. This will automatically happen if you turn 65 and meet the ultimate condition of release. See this column.
But it can also happen if you are over 60 and have ended an employment arrangement. This was previously not an overly important strategy, when the pension fund itself wasn't taxed. But now it is.
Essentially, if you switch jobs after age 60, you must call your adviser or accountant and get them to complete the required paperwork to have your TTR turned into an ABP.
Question: What happens if I’ve got more than $1.6 million in my current pension fund?
Answer: You're going to need to roll a portion of that out of the pension fund. The most you are allowed to have to start your super pension on 1 July is $1.6 million.
If you have more than that in your current pension fund, say $2 million, then you'll have to do something with that $400,000.
You have two main options. The first is that you can roll that $400,000 back to accumulation. There it will be taxed at normal super accumulation tax rates of up to 15 per cent.
For some, however, it might make sense to take it out of the superannuation system completely. That's because you are able to earn up to $20,452 outside of super and not pay any tax, under the marginal tax rules and with the use of the low-income tax offset of up to $445.
You can potentially earn more than that outside of super, under certain conditions, under the rules surrounding the Senior Australians Pensioner Tax Offset, which allows individuals over the aged pension age to earn up to $32,279 without paying marginal tax rates and individuals in a couple to earn up to $28,974 each.
For some, it will make sense to hold between $500,000 and $800,000 in assets outside of super, depending on what income they are producing, to take advantage of this second tax-free pot.
This will be an individual equation for each individual/couple. And financial advice will be required. But it will make sense for many to have their ‘second tax-free bucket’ outside of super.
Question: I've got a government defined pension. Does that count towards the $1.6 million transfer balance cap?
Answer: Yes. Essentially, multiply whatever your annual defined benefit (DB) pension pay is by 16. And that is what counts towards your TBC.
So, if you receive a DB pension of $100,000 or more, then you have used up all of your $1.6 million TBC. If you have further money in another super fund, then it will need to dealt with, either by shifting it back to accumulation, or taking it out of the super system.
More common might be if someone has a DB pension of, say, $50,000. This, multiplied by 16, would mean that $800,000 of your TBC is used up. If you had other superannuation interests, then you would be able to have a maximum of another $800,000 in pension funds.
Question: What happens if I start my new pension on 1 July with $1.6 million and I invest well and grow that to $1.8 million a year later? Do I have to pull another $200,000 back to accumulation?
Answer: No. Once you start your $1.6 million pension, you can grow it as much as you like without having to restart the amount back to $1.6 million.
You could, technically, bet it all on one stock, have that stock double over the course of one year to $3.2 million and you would then have a $3.2 million pension fund. But if that stock blows up and falls by 90 per cent to $160,000, then you've only got a $1.6m pension fund left. And you won't be able to add to it.
I don't know anyone who would take that sort of a gamble with their pension fund.
But certainly, good investing once you've started your $1.6 million pension fund will potentially allow you to continue to grow your tax-free fund, while also giving you a rising income stream.
The headwind, of course, will be that you need to take a pension each year. That starts at 4 per cent for those under 65.
I hope this helps readers with some of the most common questions that have arisen around the new rules. If you want more information, please have a look at some of the recent Advisor Q&A sessions that we've done at Eureka Report where tax expert Max Newnham and I have covered some more in-depth questions.
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.