Make the right transition - Aspire Planning Group

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Make the right transition

You may need to review your transition to retirement arrangements in light of changes to the way superannuation contributions are taxed.

Are you an Australian making the transition to retirement or would you say you’re a high income earner? If you answered yes to either question, you may need to take note of some of the changes introduced via the 2012/13 Federal Budget to the way superannuation contributions are taxed. These new rules might well affect your retirement plans.

1.     Higher contributions tax for high income earners

The federal government is doubling the super contributions tax rate to 30% for Australians earning over $300,000.

2.     Lower concessional contributions cap for over 50s

Over the past few years, Australians over age 50 have enjoyed a significant tax break on their super contributions to encourage them to save for their retirement. They have been able to contribute $50,000 a year towards their super at the 15 per cent concessional rate of tax – that’s double the standard $25,000 annual concessional contributions cap.

This tax break ended on 30 June 2012, but the government was planning to continue the incentive for Australians aged over 50 with a super balance under $500,000.

However, the government is now deferring the start of this new system to 1 July 2014.

The two-year deferral means that everyone, regardless of age, will now be subject to the same $25,000 concessional cap for the 2012/13 and 2013/14 financial years.

Stay under the limit

You may need to review your arrangements to make sure you’re not making concessional contributions over the reduced concessional contributions cap.

Going over the cap attracts a severe penalty. Any contributions exceeding the $25,000 concessional cap will attract an extra 31.5% tax in addition to the standard 15%, potentially matching the highest marginal tax rate.

With significant penalties for exceeding the cap, it’s vital to review your strategy. You don’t want to be faced with an excess contributions tax bill for 2012/13.

Plan early, plan well

Many people leave it right to the end of the tax year to look at their super. But it’s worth putting a plan in place at the start of the year to avoid the last minute rush. Early planning means you stay in control all year and can avoid inadvertently breaching the $25,000 concessional cap.

And remember, you can’t put salary into super at a concessional rate after you’ve earned it. Once your pay has been taxed at your normal marginal rate, you can’t go back and put the money into super at the lower rate.

Think about the bigger picture

If you’re very near to retirement, your ability to make additional concessional contributions might be significantly reduced.

You’ll need to work out how the changes affect your overall retirement plan, particularly if you’re planning to Transition to Retirement (TtR) or you’re currently engaged in a TtR strategy.

  • If you’re over 50 years of age and you were taking advantage of the increased cap, you may need to reduce your concessional contributions to $25,000 for at least the next two years. You’ll also need to work out what to do with any income that would take your concessional contributions over $25,000 that you previously diverted to super.
  • And if you’re earning over $300,000 per annum, you need to be aware of how the higher tax rate is going to affect your retirement planning, because your super contributions will potentially attract a 30% tax. This means you’ll only be saving 16.5% on your marginal tax rate, compared with 31.5% under the previous rules.

Look at your tax rate

For the majority of Australians, super is still the most effective vehicle for retirement saving, particularly with the super guarantee gradually increasing from 9 to 12% over the next decade.

Earnings within super continue to be taxed at 15% and income in retirement from age 60 is tax-free. But the tax-effectiveness of extra super contributions will vary depending on how much you earn.

If you’re in the higher marginal tax rate brackets, then making additional concessional contributions up to the $25,000 cap might still be a great strategy. Taxpayers on more modest salaries might look to take advantage of the government’s low earner super contributions and co-contributions. And others might want to look outside super for alternative ways to invest any additional funds.

Retirement income strategies can be complex. For instance, if you use part of your super to access a TtR pension, this may impact your future lifestyle. So please call us today to talk about what you can do to increase your future retirement income, as well as to find out more about how you could ease into retirement with a TtR pension.

What you need to know

Any advice contained in this article is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. If you decide to purchase or vary a financial product, your financial planner, our practice, AMP Financial Planning Pty Ltd and other companies within the AMP Group will receive fees and other benefits, which will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. You can ask us for more details.

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