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5 super changes – and how to prepare for them

The countdown to super reform has begun, with new rules set to take effect from 1 July. If you haven’t thought about how your super might be impacted by the changes, now’s the time to get ready.

In last year’s Federal Budget, the government proposed a wide range of reforms to Australia’s superannuation system, the most significant changes in the last 10 years.

Here’s a breakdown of the five of the most important changes – and what you can do to prepare ahead of them.

1. Non-concessional contributions

There’s a limit to how much you can put into your super through after-tax (non-concessional) contributions each financial year. This is currently $180,000 per year, and you can only make these types of contributions up to the age of 65 – or 74 if you’re still working.

If you’re under 65, you can also apply the ‘bring-forward’ rule which allows you to contribute up to three years’ non-concessional contributions ($540,000) at any time during a three-year period.

However, from 1 July non-concessional contributions will be capped at $100,000 per year – or $300,000 over three years.

If you’ve already triggered the bring-forward rule but haven’t used up all of your $540,000 cap, your remaining cap will be reassessed down on 1 July to take into account the reduced annual cap.

Also, from 1 July onwards once you have saved $1.6 million in super you won’t be able to make non-concessional contributions anymore. In addition, your ability to bring forward contributions will also be restricted once your total super savings exceed $1.4 million. So it’s worth planning ahead to make sure you don’t go over the limit.

If these contributions are a key part of your super strategy, you should speak to your financial adviser about how to make the most of the current caps this financial year.

2. Concessional contributions

Concessional contributions are the amounts put into super before tax, such as employer contributions and salary sacrifice amounts.

Currently, there are two different caps for concessional contributions: $30,000 a year if you’re under 50 and $35,000 a year if you’re aged 50 or over. From 1 July, the concessional cap will decrease to $25,000 across the board for everyone, regardless of your age.

If you’re between 65 and 74, you’ll still need to work at least 40 hours during a 30-day period continuous period before you can make concessional contributions for that financial year. And once you turn 75, your super fund will generally only accept SG contributions from an employer.

From 1 July 2018 onwards, if you don’t use the whole concessional cap in one financial year, the unused amount can be carried forward to the next year if your total super balance is less than $500,000.

For example, if you only make concessional contributions of $20,000 in the 2018-19 year, then you will be able to carry forward your $5,000 of unused cap to the following financial year – bringing your total cap for that year up to $30,000. The unused cap can be carried forward for up to five years.

High-income earners should also be aware of an upcoming change to how concessional contributions are taxed. Most concessional super contributions are taxed at 15%, but if your total income (including your concessional super contributions) exceeds $300,000, part or all of your concessional contributions will be taxed at 30% instead. From 1 July the adjusted taxable income threshold will reduce from $300,000 to $250,000.

 

3. Transfer balance cap

The ‘transfer balance cap’ will be introduced from 1 July, limiting the amount you can have in a superannuation income stream to $1.6m at commencement.

There is good news, the growth on pensions is not counted towards the cap unless the pension ceases, for example – a pension commences with $1.6m and grows to $2.0m, the growth is not treated as excess above the cap.

If your pension balance is above $1.6m you will need to move any excess amount back into the accumulation or withdraw the excess from superannuation.

So it’s important to get your financial adviser’s guidance before 30 June if you think you may be over or getting close to this cap.

4. Transition-to-retirement pensions

As you approach retirement, it’s possible to start drawing a pension from your super while you’re still working, this is called “transition to retirement”.

From 1 July the income earned by the fund will no longer be exempt from tax and will pay 15%, the same rate as your accumulation balance.

The silver lining here is if you’re over 60 the pension you withdraw from 1 July will continue to be tax-free to you.

If you’re currently using or are thinking about using a TTR pension as part of a strategy to boost your super savings, it’s worth asking your financial adviser whether a TTR strategy is still the best option for you.

 

5. Estate planning

Superannuation estate planning was complex before the changes and it is now more complex than ever.

Your financial adviser can review your estate plan while updating your super arrangements, to make sure any changes are accounted for.

 

Get the right advice

The current super reforms are complex and will affect different people in different ways. So before you make any decisions about your financial strategy, talk to your financial adviser. To get in touch with McKinley Plowman’s wealth advisers, please click here.