Super changes scheduled for 1 July 2017 create a potential risk for those making the maximum top-up. So what is this risk and why should you avoid it?
Learning from history
On 24 November 2016 superannuation amendments cleared both houses of Parliament and many of the major changes in these bills will take effect on 1 July 2017.
But it’s ‘buyer beware’ for many retirees whose super is still in the accumulation phase. And so it’s worth discussing a potential financial risk up front and out loud before you are encouraged to ‘load up’ your super before the rules change.
So where is the risk, you might wonder? Just ask retirees who took advantage of Treasurer Peter Costello’s ridiculously generous tax concessions on superannuation in 2007 and you’ll find out.
As the amount of money you could add to your super savings increased post Budget 2007, many pre-retirees borrowed heavily to make extra contributions – sometimes in the order of hundreds of thousands of dollars.
Remember what came next?
You’re right: a great big ugly Global Financial Crisis, which didn’t even start in Australia, but boy did it hit us hard. And those superannuants who had borrowed big to take maximum advantage of Treasurer Costello’s largesse were, by October 2008, right up that famous creek without a paddle.
The tide went out when the market crashed and they were left with much smaller portfolios, high debt and high interest rates. For some it actually meant financial ruin – and Australian retirees were considered to be the hardest hit around the globe.
How quickly we forget. As I said, the rules are changing on 1 July and those with a vested interest will seek you out and suggest you load up your super by as much as possible before 30 June. So if you are currently able to contribute $35,000 per annum as concessional contributions, on 1 July this reduces to $25,000. At first blush it makes sense to contribute the higher amount – for a couple this means $70,000. As an employee you can salary sacrifice this amount if you can afford to, but those with self managed super funds may be tempted, or encouraged to borrow to take advantage of this ‘last chance’ top up. Think carefully before you do so.
And those wishing to utilise this finanical year’s higher non-concessional cap of $180,000 (or $540,000 using the bring forward rule if you’re under age 65), before it reduces to next financial year’s limits of $100,000 ($300,000 using bring-forward rule) may also be considering raising debt to do so.
Once again, I hasten to emphasise this is not financial advice – you should seek a qualified opinion on the right contribution for you.
But it is a comment on why, in 2007 when so many got caught out, it made no sense borrowing to maximise contributions. And makes no sense some 10 years later, when you could possibly end up worse off.
Why? Because borrowing money to make a higher super contribution does not really make a lot of sense at all, except in one specific situation. I sought the opinion of financial and aged care expert, Louise Biti, who reminded me that borrowings to invest in super are not tax deductible. So if you borrow to put money into super and you pay say, five per cent interest, you are going to wear the full cost of paying back the interest, with no tax relief. Do your numbers, but that could make you worse off. The exception? An expected windfall or change in circumstances within the next year or two that will give you the ability to pay off the debt quickly. Louise says this is the only reason you might take out debt to make the higher contributions pre 30 June. Such a windfall might be an inheritance, a lump sum, or a substantial asset sale.
So before you allow yourself to be talked into higher debt, at a time when your employment or health outlook is less than secure, consider the worst case scenario; if the share market took a dive, interest rates kicked up, or you lost your job or had a health scare. Could you still maintain the repayments? Is it really worth the risk?
For most of us, sleeping securely at nights beats the debt-worry cycle. So tread warily when super rules change and financial product floggers encourage you to borrow big, London to a brick they won’t be around if things fall apart.
What do you think? Were you hit by the GFC? Did things fall apart for you? Or were you lucky enough to see the writing on the wall?