What is the bring forward rule?
If you have sizeable assets outside of your superannuation, the bring forward rule can be a worthwhile retirement strategy. Here’s what you need to know.
Questions about the rules around making non-concessional (after-tax) contributions into your superannuation fund and the bring forward rule are regularly posed to financial advisers.
Mostly, because it’s one strategy that can be used to maximise contributions into a super account before a person stops being eligible to contribute.
Since July 1, you’re now able to make larger non-concessional contributions, which are a multiple of six times the concessional (before-tax) contribution. The non-concessional contributions cap is now $180,000.
Related link: Great news for retirees and super!
If you’re 64 years old or younger on July 1 of the financial year and make a contribution into your super that’s over the non-concessional contributions cap, the system will automatically bring forward the next two years’ non-concessional contributions cap. However, there are conditions.
The bring forward rule is automatically triggered when your after-tax contributions are more than the cap for that financial year, which is $180,000. Once it’s triggered, the normal non-concessional cap doesn’t apply for the next two years. Instead, your total contributions over the three years can’t go over $540,000.
What many people may not know is that if you go over the concessional contributions cap, this will count towards the non-concessional contributions cap and can trigger the bring forward rule. According to the Australian Taxation Office, life insurance premiums and fund fees can count as contributions too, so make sure you consider these when thinking about making contributions to your super.
What’s the benefit of the bring forward rule?
Chris Cornish, principal financial adviser with Perth-based Avant Financial Services, says using the bring forward rule is a great retirement strategy for people who have sizeable assets outside of the super environment.
“It allows a lump sum contribution to be made of three times the non-concessional cap; this is in lieu of any further non-concessional contribution over the next two financial years,” he explains.
“An example of when this would be used is in the event of the sale of a business or investment property which realises large amounts of cash; the challenge is getting it into the super environment.”
He says theoretically a couple could get $1,440,000 into super within a short period of time, contributing $540,000 each in the next financial year.
While the non-concessional contribution limit doesn’t differ regardless of age, you do need to meet the work test (be gainfully employed for 40 hours in any 30 day period) to contribute to super if you’re over the age of 65 and unable to use the bring forward strategy.
What you need to keep in mind
Mr Cornish explains that with legislation constantly changing in the super environment, the bring forward strategy may not be the most suitable for someone who is some years away from retirement. However, for people close to retirement, or at least past their preservation age, this could be an ideal strategy if you’re willing to make significant after-tax contributions to your super.
“Depending on the level of funds available to contribute into super they need to time the contributions so that they can get all the funds into super,” he says. “For example, I have a client who utilised the bring forward rule in the year he turned 60 and just before he started a transition to retirement pension. These funds are now in a zero tax environment and even though he is still working he has partial access to them and hence he was very comfortable moving assets into the super environment. Going forward he will now only make annual non-concessional contributions until he reaches 64 at which point he will utilise the bring forward rule.”
If you’re considering working past the age of 65, you may want to use the bring forward rule when you’re under 65, just in case you don’t continue to work.
Why you should act now
If you’re focused on planning for retirement and you have significant assets outside of super, Mr Cornish says that you don’t want to let a financial year go by where you haven’t utilised the non-concessional contribution limit.
Also, if you’re about to start a transition to retirement strategy, you should consider making some lump sum contributions prior in order to maximise the amount which will be in the tax free pension component.
Related link: Why you need to know about the transition to retirement strategy