Superannuation changes - how should you react?

Australia's superannuation system was in the midst of change when I joined the personal advice industry following the introduction of compulsory super in 1992. The Diploma of Financial Planning textbooks could barely keep up, whilst those in the industry were grappling with the evolving regime.

June 1994 saw many bring forward their retirement plans, taking advantage of transitional rules which provided more attractive pension incomes. Unfortunately, this coincided with a fall in both bond and share markets, with few experienced in the volatility of investing.  

At that time, the amounts you could contribute from salary were based on age. A birthday card from colleagues in 1999 read “happy $30,356” as I moved into the 35 to 50 age band. There was no limit on after-tax contributions.

Reasonable Benefits Limits (RBLs) capped the amount of concessional super to what was considered reasonable, initially $400,000 for a lump sum and $800,000 for pensions. Drawings were taxed at marginal rates, and below the pension RBL received a 15% tax rebate. After-tax contributions came out free of tax. 

Federal Budget watching

A long held ritual on budget night as a foreign exchange dealer in the 1980's was to be at the dealing desk reacting to markets. Today you can watch the coverage from anywhere and follow the commentary on-line, before heading to early morning briefings and webinars for any impact on personal wealth strategies.

With a few years of minimal changes impacting financial planning, I was caught out in 2006 watching “Dancing with the Stars” when a major overhaul was announced to superannuation. 

Simpler super – not so simple!

RBLSs, by then indexed to $619,223 and $1,238,440 respectively, were abolished in the May 2006 Budget, with the announcement of “Simple Super", subsequently re-named "Simpler Super!" 

From age 60, drawings from pension funds would be completely tax-free along with earnings. Transitional rules meant you could also start supplementing your employment income from age 55, albeit retaining the previous taxing regime.

However, the amount you could put in would be the same for everyone. The pre-tax or concessional contribution (CC) cap would be $25,000, with the after-tax or non-concessional contribution (NCC) cap six times that amount at $150,000 pa.

Reaction from investors

Transitional arrangements provided the opportunity to put a one-off $1M into superannuation prior to the 2007 financial year end. This prompted a rush into super, by selling or transferring assets and cash. Some even borrowed short term to take advantage of the new tax-free environment.

However, after six good years of investment returns, 2008 saw the onset of the global financial crisis. Subsequent declines in investment values put many off super or opting to manage their own.

Current proposals

The May 2016 budget has proposed reducing from next financial year the CC limit back to $25,000 (from today's $30,000 below age 50 and $35,000 above). NCCs have been capped immediately at $30,000 from $180,000 pa, with no three-year bring forward for those under age 65.

There will be a lifetime limit of $500,000 for NCCs from 1 July 2007, although no impact for those that have already done more. Now even if you are not working you can put money into super up until age 75. 

Investment earnings and drawings from pension funds will still be tax-free up to $1.6 million. For those with more, even if currently drawing a pension, come 1 July 2017, assuming the rules are legislated, the extra will have to be withdrawn or rolled back to super. For the later, earnings will be capped at 15%, which is still relatively attractive depending on personal marginal rates.

Some commentators are suggesting looking to property as an alternative to superannuation. Sydney and Melbourne are among the world's 10 least affordable cities, ahead of New York, London and Tokyo, while The Economist magazine last year estimated Australian house prices are 30% overvalued.

So what should you do?

One thing's for sure, change is constant. The economy, investment markets, government policies and technology impacting on our lifestyles and ways of working. Whilst there are set ages you can access super and government pensions, these should not drive your personal decision on when to retire.

Think about what is important to you? How long do you want to work full time? Would you like to explore a portfolio career? What goals do you have for your family? Do you want to travel? What are your charitable or other community interests? What will be your legacy?

Armed with your own life plan and a sound financial strategy, it is a matter of navigating the evolving landscape to be in the best possible position to achieve what’s important to you.

Disclaimer: Whilst Stacey Martin is a licensed financial advisor with NAB Financial Planning, any advice in this article is of a general nature and has not been tailored to your personal circumstances. Do not rely on this article as the basis for making any investment, financial or other decision. Please seek personal, professional advice prior to acting.