Noel Whittaker answers your questions on changes to superannuation.
On the lead up to the Federal Election on 2 July, it’s clear that one of the main issues concerning pre-retirees and retirees is the effect that the changes announced in the Federal Budget 2016/17 will have on their superannuation balances and retirement income. Noel Whittaker’s inbox has been inundated with emails on this topic and today he answers the most common questions.
Q1. If I have made more than $500,000 of non-concessional contributions before the Budget announcement, do I need to withdraw the excess?
A. No. However, if the Coalition wins the forthcoming election and the legislation is passed, you will not be able to make any further non-concessional contributions
Q2. What happens if I make a contribution after Budget night that takes me over the non-concessional cap?
A. Anybody who exceeds their cap by making contributions after Budget night will be notified by the ATO. They will then be asked to withdraw the amount contributed above the $500,000 non-concessional cap, along with any associated earnings. If the individual withdraws the excess at this point, the earnings on the excess amount will be taxed at their marginal tax rate but they will receive a 15 per cent tax offset for the tax charged in the fund. There is really no downside in making contributions between now and the end of the financial year.
Q3. I understand that while the limits on contributions have been reduced, the unused caps can be carried forward. What would happen if I didn't work in the current financial year?
A. The caps on concessional contributions are currently $30,000 a year for people under age 50 and $35,000 a year for people aged 50 and over. These are going to reduce to $25,000 a year but the reduction will not take effect until 1 July 2017, so you have 13 months to contribute using the higher caps. Only amounts of unused concessional from 1 July 2017 will be able to be carried forward.
Q4. Is there a limit on how the unused caps can be carried forward?
A. The carry-over caps will expire if not used within five years after they have accrued. I believe this is unreasonable given the Government has stated that the purpose of allowing the caps to be carried forward is to give people who were out of the workforce a chance to catch up.
Q5. What happens if I contribute more than I am allowed?
A. If your concessional contributions in any one year are more than the concessional cap in that year plus unused amounts carried forward, the excess will be subject to excess contributions tax. This will essentially convert them into non-concessional contributions.
Q6. What sort of income and living standards would I have with a $1.6 million super balance in retirement?
A. The Government claims that a superannuation balance of $1.6 million could buy an indexed annual income of around $91,000 a year – four times the amount of the single Age Pension, which is currently around $22,700 year. If would be a useful exercise to go to my website www.noelwhittaker.com.au and then go to the Calculators section and have a play with the Retirement Drawdown Calculator. This allows you to enter your own data to find out how long your money may last.
If we enter $1.6 million, with an earning rate of five per cent, with annual drawdowns of $90,000 indexed at three per cent per annum you will see that all the money is expended in 23 years. Just understand that all long-term projections must be taken with a degree of skepticism because retirees tend to spend more money in the early years of retirement than in the later years, and earning rates and inflation in 10 years could be considerably different to what they are today. But it is still a useful exercise.
The irony of course is that this amount is about a quarter of what politicians pay themselves after they retire.
Q7. Does that cap limit apply to how much I can hold in my retirement phase account? What happens if my retirement account grows in excess of $1.6 million?
A. The cap only limits the amount you can transfer into a retirement phase account – it does not apply to the balance on that account. The balance in your pension account can grow above $1.6 million. But keep in mind that minimum drawdowns, probably at least 5 per cent, will still apply, which means the earnings will need to exceed the drawdown rate for the balance to grow.
Q8. If my pension account balance falls below $1.6 million, can I transfer more in to top it up?
A. You can transfer more into a pension account only if you have not previously exceeded the cap of $1.6 million. You will be allowed to add to it if you have not met the cap. For example, if you transferred $1.6 million and the balance fell because of a market crash, you could not top it up. But if another person had transferred only $900,000 into their pension account, they could add a further $700,000 at some stage in the future. Bear in mind, that a person over 75 now cannot add to their superannuation under the present rules.
Q9. I am 71 now and retired – can I contribute to superannuation before 30 June 2016?
A. Under the existing rules, a person aged between 65 and 75 cannot contribute to super unless they pass the work test, which involves working 40 hours in 30 consecutive days in the year in which they wish to contribute. However, if the superannuation rule changes announced in the budget are passed, a person will be able to contribute to super until age 75, irrespective of whether they are working or not. This will take effect from 1 July 2017.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org