There were some significant positives for superannuation in the 2016 Budget that have been overlooked in media coverage, says Braith Morrow, superannuation specialist and Advice Standards Manager at Findex.
Morrow says: “While the media focus has been on those changes deemed unpopular, such as a lifetime non-concessional contribution cap of $500,000 and the annual concessional contributions cap being reduced to $25,000, it has had the effect of ‘drowning out’ some good news on the superannuation front.
“The fact individuals will have the ability to make contributions to superannuation up until they turn age 75 without having to meet the existing work test is welcomed.
“A reduced concessional contribution cap of $25,000 will apply and, consequently, people who still have forms of passive income in their retirement (such as from rental properties) could benefit by maximising their tax efficiency without having to be employed.”
Morrow says many people were concerned that transition to retirement (TTR) income streams could have been abolished in the Budget. Fortunately it still exists, although the changes introduced do reduce the tax efficiency of this strategy.
“Greater consideration needs to be given to issues relating to implementing a TTR strategy, both in terms of what it what will deliver as well as when to do so.
“The Government’s original intention of providing the rules that allow for these types of income streams was to allow people to progressively wind back their working hours and ease into their retirement, rather than having an abrupt end to full-time employment.
“The changes to the rules will still cater for these scenarios while reducing the tax arbitrage opportunities before age 60.”
Morrow says another positive was the Government’s decision to extend the existing tax exemption on earnings to products, such as deferred lifetime annuities and group self-annuitisation products.
“This should allow product providers to offer a wider range of retirement income products which may provide more flexibility and choice for retirees.
“Specifically, this measure concludes the Government’s final report into the Retirement Income Streams Review that started in 2014. Central to the report was a concern that individuals were likely to outlive their consumption needs in retirement; that is the longevity risk due to increasing life expectancies.”
Morrow says that despite the winding back of some superannuation concessions, it remains a highly attractive vehicle in which to accumulate tax effective savings for retirement.
“Where an individual’s marginal tax rate sits above the superannuation earnings tax rate of 15 per cent, then tax efficiency continues to exist through structuring accumulation of wealth for retirement in that concessionally-taxed environment.
“Upon reaching retirement, an individual can continue to enjoy tax free earnings on up to $1.6 million of assets (indexed). Given that presently no rule exists to force a compulsory cashing out of accrued benefits above this cap, then superannuation still looks good if your marginal tax rate sits above 15 per cent.”
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