Superannuation - summary of key changes

If you were in any doubt as to the role superannuation can play in setting you up for retirement, recent changes to super laws should have put the issue beyond question. Super has always been a very tax-effective way to accumulate savings, particularly for individuals on the higher marginal tax rates. The advantage it enjoys over other forms of saving and investment has now widened considerably.

Changes to the rules were first outlined in May 2006, by the Treasurer, Peter Costello, and subsequently amended, in early September, after consultation with the superannuation industry. The changes aim to simplify both how you get money into the superannuation system and how the money you take out is taxed.

But not all the changes take place immediately. Some have already come into effect, but others are still subject to the appropriate legislation being passed and won’t come into effect until mid-2007. It will pay to know what changes will occur and when, so your retirement can be planned with the greatest certainty.

How the changes affect you exactly will depend on three things: how old you are now, how old you are when you retire, and how long it is until you retire.

Even though the new rules make super more attractive and, in many respects, simpler, there is still some complexity, and expert advice will still be necessary to ensure you make the most of what’s on offer.

For example, after consulting the industry, the Treasurer announced a one-off transitional rule to allow individuals to make up to $1 million of so-called undeducted contributions (that is, contributions to a super fund for which you do not claim a tax deduction) between 10 May 2006 and 1 July 2007.

But you have to be aged under 65 to take advantage of the rule, or be aged between 65 and 74 but have met certain tests to do with how much paid work you did in the year you make the contribution.

Whenever superannuation rules change there are flow-on effects, particularly with social security rules (including the age pension). Seeking advice on how these two aspects of retirement interact is also critical.

One thing that hasn’t changed, though, is that planning for retirement can still be broken down into four steps: Getting money into a superannuation fund; maximising its returns while it’s there; getting the money out (and producing a retirement income stream from it); and maximising social security benefits.

“How the changes affect you exactly will depend on three things: how old you are now, how old you are when you retire, and how long it is until you retire.”

Getting money in

You may make either undeducted contributions or deductible contributions (contributions you can claim a tax deduction for).

Changes to how you can get money into the superannuation system are largely designed to make it simpler - doing away with many of the previous age-based limits - but may make it more difficult to make very large contributions as you get close to retirement.

You may continue to make contributions right up to age 75, provided you meet a so-called "work test", which basically means that if you're aged 65 to 74 you must work in the year in which you make a contribution to super, and it must be for 40 hours during a consecutive 30-day period each financial year. The work test doesn't apply if you’re aged under 65.

If you contribute more than you're allowed, the penalties are likely to be severe. Until 1 July 2007, you can get the "excess contribution" back without being penalised, but after this date the contributions will have to stay in the super fund, and will be taxed at the highest marginal tax rate plus the Medicare levy. It would be a much better idea to avoid making an "excess contribution" in the first place!

Deductible contributions

From 1 July 2007, these will generally be limited to $50,000 a year. But if you're aged 50 or older in the year you make the contribution, you may contribute up to $100,000 a year up to and including the 2012 financial year. Afterwards, contributions will be subject to the same $50,000-a-year cap as everyone else.

If you’re self-employed, you will now be able to claim a tax deduction on your full contribution up to the relevant limit ($50,000 or $100,000). Previously, you could only claim a full deduction on the first $5,000 contribution and then on only 75% of the rest, up to your age-based limit.

Undeducted contributions

Until 1 July 2007, you have an opportunity to contribute up to $1 million. But contributions will be limited to a much lower level after this date. From 1 July 2007, undeducted contributions will generally be capped at $150,000 a year. If you're aged under 65 you can bring forward two years of contributions and make 3 years worth of contributions all at once, so you can make a $450,000 contribution. But if you do this, you'll not be allowed to make contributions for the next two years. A couple may be able to contribute $900,000 in one year (two times $450,000) but would not be allowed to make any contributions for the next 2 years.

While your money is in the fund

There are no great changes to what you’ll need to think about while your money is in your super fund. The basic investment principles of managing risk and setting an investment mix that's right for your retirement goals still apply; advice on investment strategies and on specific investments will continue to be important.

Getting your money out

Easy! The single biggest and most compelling change to superannuation is that provided you've reached age 60 when you retire, and you retire after 1 July 2007, all the money in your superannuation fund may be withdrawn tax-free, regardless of whether you take it as a pension or as a lump sum.

Previously, you could get a certain amount out tax-free, but there were "reasonable benefit limits" (RBLs), which capped how much you could get out while still enjoying the concessional tax rates that applied to super benefits (one limit if you took the benefit as a lump sum, and another limit if you took the benefit as a pension). RBLs will be abolished from 1 July 2007 as well -so you will be able to build up as much money in superannuation as you like.

Maximising social security benefits

One possible consequence of the change is that you’ll have significantly more money when you retire than you would have before (because you will not pay any tax on your super benefit).

This may have implications for your social security entitlements, but there are still strategies that can be used to maximise these. Your Hillross financial planner’s assistance will be critical in making sure you get everything you’re entitled to.

Another date to bear in mind is 20 September 2007. After this date, all the money you invest in a "complying" income stream product will be used to assess your eligibility for the age pension. But, as a significant trade-off, the pension assets test taper rate will be halved, so you’ll only lose $1.50 a fortnight of age pension entitlement for every $1,000 of assets you have in super, over and above the assets test-free area.

"...provided you’ve reached age 60 when you retire, and you retire after 1 July 2007, all the money in your superannuation fund may be withdrawn tax-free, regardless of whether you take it as a pension or as a lump sum."

The importance of advice

The simplification of the superannuation system has made redundant some of the more complex strategies often used to maximise superannuation savings. But the need for good advice is by no means eliminated by the changes. Particularly when it comes to the transitional periods for contributions, good advice will remain extremely important. And if you plan to retire before age 60, you’ll still have to get some help with tax planning and other strategies - such as contributions splitting - that will maximise your retirement position.

Strategy still matters

Since there’s no tax any more on the money you take out of super (provided you’re aged over 60 when you retire, and you retire after 1 July 2007), the focus of your retirement planning strategy should focus on maximising contributions (subject to the relevant limits) and maximising your investment returns (subject to the usual constraints of risk management and proper diversification, and so on).

For example, the Government's so-called "co-contributions" scheme may be helpful. If your assessable income is less than $58,000 a year - this may be the case if you're working part-time or if you're the lower income-earning spouse, say - and you make an undeducted contribution to your super fund, the Government will make a contribution on your behalf, to the same fund. The co-contribution is greatest - at the rate of $1.50 for every $1 you contribute - if your assessable income is less than $28,000 a year. It gradually phases down to nil once income reaches $58,000 a year.

You may make contributions to a super fund either from money you earn after you've paid income tax on it, or through a process known as "salary sacrifice", which means you forgo salary, and it gets paid straight into your fund, before you pay income tax on it. Salary sacrifice requires a bit of forward planning (and an employer who will co-operate), but it can help you get more money into your fund than would otherwise be the case.

Superannuation is now head and shoulders above virtually all other forms of investment for preparing for a comfortable retirement. Properly harnessed, it can be the vehicle that sets you up for a rewarding and enjoyable life after work.

It’s still important to find a good financial planner, who can keep you up-to-date with not just the latest changes but any that may arise in the future, and to make sure you're making the most of the opportunities superannuation provides.