Simplified Super - Eureka Report Article
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Simplified Super
By Scott Francis |
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| PORTFOLIO POINT: Each of the three stages of superannuation investing is affected by proposed changes, says Scott Francis. | The 2006 budget is a breakthrough. If nothing else it will help to simplify superannuation, which must be a positive. Under the proposed changes, a person no longer has to understand reasonable benefit limits (RBLs), age-based contribution limits, 15% pension tax rebates, the tax treatments of different superannuation components, compulsorily withdrawals of superannuation benefits at a certain age, different tax treatments of lump sum or income stream withdrawals from superannuation, the role of minimum and maximum pension factors that change every year, calculations of the tax-free portion of an income stream or the tax effect of taking lump sum withdrawals from superannuation. Although there are transition arrangements for some people between the ages of 55 and 60 (and this package of transition initiatives may yet be enlarged in the coming weeks), this article focuses on the changes that will affect those people looking to access their superannuation benefits after the age of 60.The transition arrangements are designed to keep the system similar to how it functions now, with people then receiving the full benefit of these proposed changes once they reach the age of 60. There are three key stages in superannuation investing and each stage has relevant changes following the budget. 1: CONTRIBUTING TO SUPERUnder the proposed changes people contributing to superannuation will be able to contribute $50,000 where a tax deduction is claimed, such as 9% employer contributions and salary sacrifice contributions. They would be able to contribute a further $150,000 a year of their own "after tax" money (also known as undeducted contributions). Self-employed people, who previously have been able to claim a tax deduction for their first $5000 of superannuation contributions plus 75% of the value of contributions up to their age-based limit, will now be able to claim a tax deduction each year for contributions up to $50,000 and make a further $150,000 a year of their own "after tax" contributions. They will also have access to the government's superannuation co-contribution, whereby the Government contributes $1.50 for every personal contribution of $1, up to a set limit if they earn less than $58,000. Importantly for small business owners, the proposed changes keep the capital gains tax exemption rule relating to the sale of a small business. 2: SUPER FUNDS IN ACCUMULATION MODE The reasonable benefit limit (RBL) currently restricts the amount of concessionally taxed superannuation a person can access in their lifetime. This is a complex system, with some people having access to a higher transitional RBL or arranging their retirement assets in such a way as to be able to access a higher pension RBL. The proposed changes to superannuation completely remove the concept of a limit to the amount of superannuation that can be accumulated.The tax rate on the investment earnings of superannuation funds in accumulation mode will stay at 15%, with a discounted capital gains tax rate of 10%. The 15% tax rate is half that payable on assets invested in a company (30%), and one-third of the highest marginal tax rate from July 1, of 45% (plus the Medicare levy of 1.5%).3: PAYING BENEFITS FROM SUPER Currently there are a series of "compulsory cashing" requirements, where you are forced to take your superannuation benefits once you reach a certain age and are retired from full-time employment. Under the proposed changes you no longer have to access your superannuation benefits until you wish to. The proposed changes mean that once you reach 60 there is no tax on any withdrawals from superannuation. You can take lump sum withdrawals, a series of lump sum withdrawals or income stream withdrawals without paying any tax. If you choose to take an income stream from super, proposed changes mean all you have to do is to take at least a minimum payment each year. The proposed minimum is 4% a year for someone aged between 55 and 64, and 5% a year for someone aged 65 to74. There is no set maximum: you can withdraw as much as you need. This will give you great flexibility if, for example, you need a large sum of money in one year to renovate your house. You can simply take a large, tax-free withdrawal from superannuation. The proposed minimum withdrawal levels should not be of too great a concern. With investment returns on cash being 5%, you should be able to replace the income withdrawn each year comfortably, so you are not eating into your superannuation balance. The modelling in the proposal suggests that an earning rate of 5% will see your superannuation last you well beyond the age of 100 if you only take the minimum payment each year. One of the most important changes following the budget is in income streams. At the moment there are many options for different income streams paid from superannuation assets. These include allocated pensions, term allocated pensions (market-linked income streams) and annuity-style income streams. These are replaced by this one income stream proposal. Another important change will be reduced access to the social welfare system for retirees. The asset test for Centrelink purposes is proposed to change so that rather than $3 of income being lost for every $1000 of assets over the asset test limit, only $1.50 of income will be lost. One of the downsides of the simplification of the income payments is that some people will be unable to use a "complying income stream", which can be used to halve the value of their assets for the Centrelink asset test purpose; however, the lower rate of reduction in the asset test will provide some compensation for this. Separately, there are two other negatives with superannuation that have not been fully revealed in the budget press coverage this week. The first is that the 9% compulsory contributions will not be enough to fund Australia's retirement requirements. Moreover, on an individual basis, most investors will need to look at strategies that will either increase superannuation through additional contributions, or have a plan to create additional wealth outside of superannuation. The second is that superannuation cannot be accessed until we reach our preservation age, between 55 and 60. This has to be taken into account in planning a saving and investment strategy that includes superannuation. Superannuation has much going for it, including that it is the lowest tax environment that most people can access and that it provides retirement benefits tax-effectively. Under the proposed superannuation changes the retirement benefits are tax-free, there is more flexibility than ever in accessing these benefits, the rules for contributions are simpler and it is still a low tax investment environment. These changes mean that more than ever an important part of a person's wealth creation plan should be to understand and use superannuation to help them meet their financial goals. * Scott Francis is an independent financial planner based in Brisbane. He has an MBA from the University of Queensland. | |
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