How the government's super changes really work
JUST before the Federal Budget, I flagged the possibility of a change in the rules regarding transition to retirement pensions.
I was right - their effectiveness has been reduced by taxing the superannuation fund as if it was in accumulation mode from July 1, 2017, and by reducing the amount that can be salary sacrificed to $25,000 a year.
The essence of a TTR is that you reduce your gross income by salary sacrificing a big chunk into super, and then make up the shortfall in your net pay by starting a transition to retirement pension. As the following example shows, this strategy was used to give high-income earners a huge boost to their super.
Think about Jim, aged 60, who earns $260,000 a year, which puts him in the 49% tax bracket. Under the existing rules, he is allowed to salary sacrifice $35,000 to super and lose just 15% in contributions tax. This boosts his superannuation fund by $29,750 - the same money taken in hand would be worth just $17,850. The icing on the cake for Jim is that by using this strategy, his fund becomes a tax-free pension fund, and the pension he draws from it is tax-free.
Under the proposed rules, while Jim can still use this strategy, the maximum concessional contribution will be $25,000, his fund will not become tax-free when he starts a pension, and the tax on his contributions will be 30%, not 15%.
This is not to say that salary sacrifice is still not worthwhile. A person earning between $180,000 and $250,000 a year will still be allowed to put $25,000 into super as a tax deduction and lose just 15%. Money taken in hand would lose 49%.
These proposed changes to super open up a whole new world for anybody planning for retirement. The need to make provision for your own retirement still remains as great as ever due to rising life expectancies and the inability of governments to live within their means. Interest rates fell again last month and will almost certainly keep on going down. The big change now is we need to rethink how we build our wealth.
*Noel Whittaker is the author of Making Money Made Simple. His advice is general and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org