Amidst all of the ‘white noise’ late last year surrounding Donald Trump’s election win, a number of significant changes to superannuation were passed relatively quietly by both houses of Parliament, and subsequently received Royal Assent.
These included, but were not limited to:
- $1.6m cap on superannuation funds transferred to tax free pension account
- $25,000 annual concessional contribution cap for all members
- $100,000 annual non-concessional contribution cap
- Super contributions tax increased to 30% for income earners > $250,000 p.a.
- Removal of anti-detriment provisions
On Budget night Treasurer Scott Morrison stated that only 4% of superannuation members would be affected by these changes, and overall the financial media tended to agree that his estimate was accurate.
However, I suspect that while only 4% of superannuation members will be impacted at contribution stage, perhaps closer to 100% of members have the potential to be impacted at the time of withdrawal from the superannuation environment. This is particularly due to the removal of the anti-detriment provisions. More on that shortly.
For those of us already accustomed to continual superannuation tinkering, a period of superannuation stability is still out of reach. The stated objective of superannuation, namely "to provide income in retirement to substitute or supplement the age pension,1 is to be enshrined in standalone legislation. It is this that will provide a framework against which future – yes future – superannuation policy proposals can be assessed.
And now, Transition to Retirement strategies, while still tax advantageous, are not nearly as effective as they were under the legislation to date.
- The $1.6m tax free pension cap won’t impact the majority of superannuation members, but for those who are affected it will require ongoing fine tuning of their overall strategy and the management of their Transfer Balance Account (TBA).
- The contribution caps, both concessional and non-concessional, will just have to be managed. Even with the provision to make ‘catch up’ contributions, these caps can constrain the peak funding years when the kids have finally moved out and the mortgage has been repaid, and cash flow surplus has increased just in time to prepare for retirement.
- The anti-detriment provisions, whereby a superannuation death benefit paid to a beneficiary could be boosted by a refund of the contributions tax paid on concessional contributions, look to be a thing of the past from 1 July 2017. This will quite possibly become the sleeping giant in future years, particularly when a spouse has pre-deceased the member and the superannuation death benefit recipient is an adult child. This could result in part or all of the benefit being taxed at 15% plus Medicare Levy.
This is not to say that superannuation is a bad thing; on the contrary superannuation is a very good thing; hence why these changes have been introduced to limit just how good it can be. Superannuation should still form the cornerstone of every investor’s retirement plans, but just as we diversify across asset class, or shares, or even banks, for a truly flexible retirement, consideration should be given to alternative strategies that complement superannuation.
A complementary strategy could be investing in investment bonds, which are flexible and tax effective pre and post retirement, and may provide a solution if you are stifled by the superannuation changes.
For example, take the case of Julia who is aged 50, has a salary of $100,000 per annum plus superannuation, no outstanding debt to repay, and has recently inherited $300,000. Julia currently has her inheritance held in term deposits with her local bank, and has concerns that her siblings may challenge her future estate assets.
Let’s look at what would happen if Julia was to contribute the $300,000 into an investment bond and commence a regular income stream of $15,000 annually, whilst salary sacrificing an additional $15,500 into superannuation to take her to her concessional superannuation cap of $25,000.
Source: ATO, Australian Unity
Excluding any superannuation pre-dating the implementation of this strategy, in 10 years’ time at age 60, we assume Julia’s superannuation balance to be $301,445 and investment bond balance $323,285. Under present legislation, Julia’s superannuation balance would be tax free to withdraw once a condition of release has been satisfied as her preservation age has been reached.
As the investment bond has now reached its 10th anniversary, its total proceeds could also be withdrawn tax free. Most importantly, Julia has retained access to the investment bond at all times and met her goal of maintaining flexibility and liquidity. Additionally, she has lowered her annual taxable income and Medicare Levy, protected the funds from bankruptcy, as well as streamlining and simplifying her estate planning needs.
This strategy may offer peripheral advantages; it may result in a much lower adjusted taxable income, therefore minimising the effect of relevant levies such as Medicare Levy, while potentially improving the retention or outright eligibility of other peripheral benefits such as Family Tax Benefit Parts A & B, Health Insurance Rebates, and the like, for which eligibility is assessed upon taxable income.
In effect, the investment bond is phase one of Julia’s retirement. Once Julia reaches her preservation age, her accumulated superannuation benefit becomes phase two.
At this later date, a further strategy could be to withdraw the remaining balance from the investment bond – particularly as it has passed its 10th anniversary and withdrawals are now non-assessable – and top up her superannuation or maybe take a world trip, or even buy that beach house she always dreamt of retiring to.
An investment bond strategy may not be for everyone, nor does it replace common sense basic financial planning principles. But given the ever tightening superannuation rules, when an investment bond is used appropriately it can offer significant value for investors who are looking to accumulate wealth outside the superannuation environment and perhaps help guard against superannuation’s constant legislative tinkering.
* Source ATO IT2346 March 2017.
Lifeplan Investment Bond is issued by Lifeplan Australia Friendly Society Limited, ABN 78 087 649 492 AFSL 237989, 111 Gawler Place, Adelaide, SA, 5000. The information does not take into account the specific investment objectives, financial situation or needs of any particular investor. It is recommended that appropriate and independent professional advice be obtained before making any decision based on the information presented. Please refer to the current Product Disclosure Statement (PDS) for product details, available from www.australianunity.com.au or by calling 1300 133 285. Lifeplan is part of the Australian Unity Group.
Any tax information provided here and in any disclosure documents is general in nature and is only intended to provide a guide on how tax may affect investors. Tax laws may change in the future and may affect an investor’s tax position. Investors should seek independent tax advice relevant to their particular circumstances.