NEWS
The proposed new super rules - Contribution limits
8th Jan 2007
The proposed new super rules* will ease the way for people who are looking to retire in the next few years. But what if you’re not ready for retirement just yet? And what if you’ve looked at your assets and super and decided you’re not going to have enough to fund your retirement?
Using super to fund the gap is a great way to save. The flip side of the proposed new super rules is that the Federal Government has imposed some limits on how much you’ll be able to contribute to super on a tax-effective basis. So if you want to take full advantage of the tax concessions you get for using super to boost your retirement savings, you’ll need to know about the limitations.
Contribution limits for the current financial year
Importantly, the Government proposes to increase the limit you can contribute to super for the current year. Under the proposed changes you can contribute up to $1 million in after-tax
contributions until 30 June 2007. This amount includes any after tax contributions you’ve already made from 10 May 2006 (Budget night). You may not have a spare $1 million to contribute. But since this is a one-off opportunity to contribute more before the proposed
new $150,000 per year limit kicks in, you seriously need to consider how much you can contribute.
Contribution limits from 1 July 2007
From next year, the following restrictions apply under the proposed changes:
• You can only make after-tax contributions of up to $150,000 per year.
• If you’re under 65, you can bring forward two years of after-tax contributions and make a one-off contribution of $450,000. But if you do this, you won’t be able to make any further contributions for the following two years.
• You can make salary-sacrificed contributions through your employer of up to $50,000 per year (although this is reduced by any compulsory superannuation Guarantee contributions
your employer makes on your behalf).
• If you’re over 50, you can make salary-sacrificed contributions of up to $100,000 per year until 30 June 2012. After that, the $50,000 limit will apply.
There are a number of opportunities that exist for you to grow your wealth towards your retirement as a result of the Budget announcements. The best opportunities for you will depend on your circumstances and your future goals. Talk to your financial adviser about what’s the best way forward for you.
Super is now more tax-effective in retirement
8th Jan 2007
Since Budget night, the Government has clarified the proposed new rules* (which are intended to apply from 1 July 2007) several times. And in September they announced some additional proposed concessions. So, what do all these proposed changes really mean for you?
Super is now more tax-effective in retirement.
From 1 July 2007, if you’re over 60 and can withdraw your money from a taxed super fund, the money you withdraw will be completely tax-free under the proposed new rules. It doesn’t matter if you take the money as a lump sum or as a pension. Of course, if you do decide to take it as a pension it’s even better for you. The money you have inside super that supports your pension is growing and it’s also completely tax free. This means the Government won’t get a cent of your hard earned retirement funds.
Jim and Jane – a comparison.
To illustrate how tax-effective super will be under the proposed new rules, let’s compare Jim and Jane’s situations. At 1 July 2007 both Jim and Jane will be over 60. They each decide that they’ll need $40,000 a year to live on after tax.
Jim
Jim’s money is invested outside super. Because he has to pay tax on his investment income, his investments will need to earn $51,600 to give him the $40,000 he needs after tax. Say Jim’s investments were generating a 5% income return. He’d need an investment of $1,032,000 to generate the $51,600 each year. What if Jim doesn’t have $1 million invested? He’d have to sell some of his assets (like his home or shares) to get the $51,600 pre-tax amount he needs. Of course, he might also have to pay capital gains tax when he sells these assets – so he might need to sell even more just to cover this tax bill. The following year, Jim would have fewer assets invested. So he’s further away from his income requirements and will have to sell even more assets. It becomes a vicious cycle.
Jane
Jane’s money is invested through super. From 1 July 2007 she won’t have to pay tax on what she withdraws under the proposed new rules because she’s over 60. That means she’ll only need to withdraw $40,000 pre-tax to get $40,000 post tax. If Jane’s investments are, like Jim’s, generating a 5% return, she needs $800,000 invested in super. That’s almost 22.5% less than if she invested outside super. And if Jane does need to draw on her capital to get the $40,000, by drawing from a pension she doesn’t pay capital gains tax. So she only needs to withdraw to the extent she needs extra money. Which means she has more money retained in super to work for her in future years. What a super difference!
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