With a week to go before the 1 July 2017 superannuation changes, high net worth (HNW) individuals must act quickly or risk being caught short.
How the changes will affect you will depend on your age, the amount held in both yours and your spouse’s (if relevant) superannuation pension and accumulation account, and potential for future contributions.
If you’re already retired, super will still provide tax-free earnings for pension account balances under $1.6 million. Even if you have more than $1.6 million in super, tax on these surplus earnings is a relatively low 15%.
If you’re under 65 and still a few years away from retirement, you can still make personal, post-tax contributions of $100,000 per annum after the deadline, or bring forward three years’ worth of contributions in one year. They’re an attractive opportunity to increase your superannuation balance before retirement, but the limits are lower than currently available.
If you’re in the early or middle stages of your career and focused on building wealth, the reduction in contribution caps might prompt you to question how you’ll accumulate sufficient assets within superannuation to meet your retirement needs. Many younger investors might also question whether super, as a long-term investment and with the level of Government interference we’ve seen recently, is the best place to build wealth at all. However, it remains the most effective structure to accumulate and preserve assets for retirement.
Investors should build their nest egg as early as possible by siphoning off a small amount of salary each pay into superannuation. You will be able to contribute up to $25,000 of your pre-tax salary to superannuation each year and pay only 15% tax on the contribution, as opposed to tax at your marginal rate.
Three key changes in superannuation
1. Transition to Retirement
A Transition to Retirement (TTR) pension is an income stream paid to a member who has reached their preservation age (currently 56) but is still working. Although currently the investment earnings from superannuation assets used to fund a TTR pension are not taxable, from 1 July 2017, earnings will be taxable in the fund at regular superannuation tax rates.
If you’re affected by this change you will need to determine whether it makes sense to continue drawing a pension or commute (stop) the pension. Once you retire or turn 65, your pension is no longer considered a TTR pension and would continue to receive tax-free earnings.
2. Pension balances over $1.6 million
If your superannuation pension balance is greater than $1.6 million you will need to move the excess amount from the pension to the accumulation part of your fund, to a spouse’s fund, or out of superannuation altogether. You can still continue to have more than $1.6 million in superannuation so long as it is held in accumulation, rather than pension phase. Penalty tax rates will apply to pension amounts in excess of $1.6 million.
3. Capital gains reset
If you’re affected by the $1.6 million pension cap or TTR rule changes, you can elect to refresh the cost base of assets in your fund. This would allow you to reset assets to their market value on 30 June 2017. If you have an SMSF with large unrealised capital gains, this could be a good opportunity to reduce future capital gains tax.
The strategies to manage the superannuation changes are complex. HNWs should seek advice from an independent financial adviser. If you are already receiving financial advice, but have had no communication about how the changes will affect you, you should be on the phone today.
Simon Curtain is a Director and Private Client Adviser at Hewison Private Wealth. This article does not consider the circumstances of any individual.
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