Great news for retirees and super!
For those heading into retirement, the changes to superannuation concessional contributions will mean bigger super savings. Here’s what you need to know.
Money is contributed into your super fund under two types – concessional (before tax) and non-concessional (after tax). However, there are caps on the amount you can contribute to your super each financial year, which are taxed at lower rates.
If you go over these caps, you’ll need to pay extra tax. The cap amount and how much extra tax you may have to pay depends on your age and whether the contributions are concessional or non-concessional.
Concessional contributions are where an individual has been concessionally taxed on the contribution – that is they have not been taxed at their marginal tax rate and instead are taxed at 15 per cent. Compulsory super guarantee payments from an employer and salary sacrifice are examples of concessional contributions.
What are the changes?
The government announced that from July 1 the annual cap of $25,000 for concessional contributions will be lifted to $30,000. On top of this, the annual cap of $35,000, which was temporarily granted to those who were 60 or older, will be expanded to include those 50 or over in the 2014-15 financial year.
Chris Cornish, principal financial adviser with Perth-based Avant Financial Services, says the changes are very good news for people heading into retirement for a couple of reasons.
“First, it provides individuals over 50 with the ability to significantly increase their salary sacrifice into superannuation,” he says. “Second, everyone can now make larger non-concessional (after tax) contributions; this is because the non-concessional contributions are a multiple of six times the concessional contribution, so this moves from $150,000 to $180,000.”
Changes were also made to the controversial Superannuation Excess Contributions Tax, which slugged people who inadvertently put too much money into their super with a tax of 46.5 per cent.
People will now be able to withdraw their excess contributions rather than have to pay a penalty for what may have been an accident or mistake.“This is a logical and common sense decision from the government,” Mr Cornish says.
How do I maximise the changes?
For those who are planning for retirement, one of your strategies should be to maximise your super contributions. The higher contributions cap means you’ll be able to pump more money into your super in a tax effective way.
Look into reviewing your salary sacrificing arrangements if you’re still in the workforce, with a view to increasing it. Since July 1, compulsory employer super contributions rose from 9.25 per cent to 9.5 per cent and will remain there until June 2018 when it will rise by 0.5 percentage points each year until it reaches 12 per cent.
Does the timing of my super contributions matter?
Mr Cornish says that while there are a number of different answers, there are a few things people should keep in mind.
Firstly, the sooner you can get funds into super the more time it has to grow in a concessionally taxed environment. Secondly, if you have significant assets outside of super and are focused on retirement planning, you don’t really want a financial year to go by where you haven’t utilised the non-concessional contribution limit. This has now increased to $180,000 a year.
“If someone is about to start a transition to retirement strategy they should consider making some lump sum contributions prior in order to maximise the amount which will be in the tax free pension component,” he explains.
The timing of your contribution is also important when it comes down to the financial year a contribution is counted in. For example, if your super fund doesn’t receive a contribution from your employer on your behalf until July, which may have been paid in June, then this will count towards the next financial year. Not the one the payment was made in.
Retirement planning should involve maximising your super balance as much as possible, and while the super changes don’t alter that, they do help in accomplishing it.
Related link: Get the most out of your retirement income