This article was first written for PS News in May 2017.
Come 1 July, superannuation, especially for public servants, will undergo a massive overhaul, the biggest in 10 years.
You need to start thinking about it now, so that you don’t get stuck hearing for the next 20 years about how your brother-in-law made all the right moves and you missed out.
The amount of money workers can put into their super will be reduced.
Concessional contributions, those made with before-tax money such as salary sacrificing, will be restricted to $25,000 annually for everyone, regardless of age.
Non-concessional contributions (NCC), which are made with after-tax money (from say, an inheritance or Powerball win), will be constrained to $100,000 per year.
However, there are special rules allowing three years’ NCC at once, and if you have a large amount of money that you want to get into super, or, say, an investment property that you want to move into your Self-Managed Super Fund, then you will need to get cracking before 30 June. Independent financial advice would be useful here.
Planners manage the money
The real guts of the new legislation though involves a “transfer balance cap” limit of $1.6 million.
This means that a superannuation account that pays a pensioncan’t have a balance exceeding $1.6 million.
A superannuation account in which money accumulates while you’re working can have unlimited funds, and tax is still payable on these earnings at a rate of 15%. Which is a much lower rate of tax than you pay while working full-time, hence it often makes sense to get your money into super, so that you give the taxman less.
Most Australians, including Public Sector Superannuation Plan (PSSap) members, use accumulation accounts while working. When they retire and the money moves into pension phase, they will not, from 1 July, be able to have a pension account balance of more than $1.6 million. The excess funds will have to go back into an accumulation account, or be withdrawn from super.
Commonwealth Superannuation Scheme (CSS) members and Public Sector Superannuation Scheme (PSS) members will have a defined benefit pension available to them, and special rules have been drawn up to correspond these types of super with the $1.6 million limit.
Essentially, the annual entitlement is multiplied by a factor of 16, and the resulting figure, called the “special value”, is applied against the transfer balance cap.
Annual pensions over $100,000 will therefore exceed the cap ($100,000 x 16 = $1,600,000) and so will have tax consequences.
Exactly how much tax is payable will depend on whether the amounts involved have taxed, untaxed or tax-free components.
Upon retirement, CSS/PSS members, and others eligible for a defined benefit pension, will usually have the option of taking some or all of that as a lump sum.
Commission returned to clients
It is a sad fact that historically many financial planners might encourage such a move so that as planners they get to manage the money (and charge a fee for doing so), or receive ongoing commissions for transferring that money to a super fund, commissions that are paid out of your super balance.
This is why financial advice should come from independent advisers who don’t accept commissions (but pass them onto clients) nor charge fees as a percentage of your funds.
In our view, in most circumstances, the full pension payable by the public system has a lot of advantages, especially the lifelong indexed pension which studies have shown contributes to longevity through lowered stress levels. However, managing such a pension alongside other wealth considerations can be a complex task.
The $1.6 million limit may not necessarily be exceeded with one person’s superannuation benefit, but the death of a partner who has a superannuation balance and/or a reversionary or death benefit pension may cause the limit to be surpassed.
To prevent exceeding the balance cap limits forethought and planning is usually necessary.
Investing in independent financial advice can pay off tremendously in the long run, both for yourself and your loved ones down the track.
You can help friends and colleagues from the Public Service (past and present) by sharing this article, and if you would like independent financial advice about what steps to take for yourself, choose a financial planner from the Independent Financial Advisers Association of Australia which can be accessed at www.ifaaa.com.au.
* Jacie Taylor is an independent financial adviser with Periapt Advisory and believes that if you love what you do, you never work a day in your life.
She can be contacted at www.periapt.com.au
