Fiddling with our super has made saving for old age a lot more risky.
Get rid of the kids, pay off the mortgage, start piling money into super – that used to be how it was done. Well, thanks to recent developments, those days are over.
We’ve had barely eight weeks’ notice but when it ticks over to the new financial year on July 1, the amount you can contribute pre-tax each year to super will halve overnight – from $50,000 to $25,000. You might be thinking half your luck to have even $25,000 to put into super.
However, this so-called concessional contributions limit will include whatever your employer pays. Which means if they contribute $10,000, you can only add an additional $15,000.
Again, what’s the fuss? Simply, the new cap renders useless the time-honoured strategy of throwing all your money at securing a comfortable retirement after you’ve discharged your other responsibilities.
Let’s take someone with $100,000 in super, whose employer contributes $10,000 a year and who wants to retire on $35,000 a year at age 67 (the new retirement age).
Modelling by Strategy Steps shows that today you could reach your target if you first dealt with the children and mortgage and then started salary sacrificing the maximum $40,000 a year at age 50.
Once the allowable additional amount drops to just $15,000 however, you’ll have to start a full 10 years earlier – at 40.
Alternatively, you would need to supplement your salary sacrifice from age 50 with an annual after-tax contribution of $19,000. The limits here remain unchanged at $150,000 a year, or $450,000 averaged over three, but the loss of tax concessions means in our scenario a 41.5 per cent taxpayer would fork out an extra $7,500 a year.
Another, probably even less appealing option is to delay retirement to age 72. Such will be the situation when transitional arrangements allowing the over 50's to contribute more – also halving on July 1 from $100,000 to $50,000 – end in 2012.
The changes have been billed as a crackdown on generous tax concessions for the rich. And yes, you would have to earn close to $300,000 for your employer’s required contribution to approach the new limit. But the reality of our system is that people on far less rely on the spare capacity offered by the existing limits to direct all the money they can into super in their last few years of work – when finally they can.
Not only do the new rules reduce significantly the practical effectiveness of super, they also highlight that when you place all your bets on this government condoned retirement vehicle, you take on legislative risk. First there’s the wide-ranging super review scheduled to report back in June 2010; second there’s the risk that successive governments faced with a budget black hole will pare back benefits further.
So what else can you do? Negative gearing into either property or the sharemarket just became a whole lot more attractive. With tax deductions available on investment losses, this is a tax effective supplementary strategy.
And don’t forget your own personal tax haven: the family home. You could spend money on renovations to improve its value and then downsize to realise the tax-free gains on retirement.
Stick just with super and not only will you have to start putting money in before it is perhaps feasible, you also might have to wait longer to get it out. Oh, and you’ll probably still have a house fill of kids.
Publication: The Sun-Herald Date: May 31, 2009 Author: Nicole Pedersen-McKinnon.
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