Q:  Should I be worried about the reduction in the amount that I can put into super from 1 July 2017. I am currently age 44 and earning $140,000 per annum. I am currently focused on educating my children and repaying my mortgage. I expect to have the capacity to place funds into super in my mid 50’s. Is this the right way to save for my retirement?

 

A:  You are not alone. Many Australians delay saving for their retirement until their mid-50’s when the mortgage is repaid and the kids are educated. Whether this is the right strategy to achieve your retirement goals depends upon your individual circumstances.

As part of the super changes from 1 July 2017, the Government has reduced the concessional contribution cap to $25,000 regardless of your age. The concessional contribution cap includes the 9.5% super guarantee contributions made by an employer, pre-tax salary sacrifice contributions by employees and personal deductible contributions made a self-employed person.

What are pre-tax salary sacrifice contributions into superannuation?
Salary sacrifice is an arrangement with your employer to forego part of your salary or wages in return for your employer providing benefits of a similar value. If you make super contributions through a salary sacrifice agreement, these contributions are taxed in the super fund at a maximum rate of 15% [1].

The table below outlines the contribution cap changes since 1 July 2007 and the capacity you would have to make additional pre-tax salary sacrifice contributions.

From 1 July 2017, the reduced concessional contribution cap will have a bigger impact on people over age 49 and people’s capacity to tax effectively save for their retirement via salary sacrifice contributions. In your case, based on your salary of $140,000 per annum, your employer will contribute $13,300 (ie $140,000 x 9.5%) leaving you with a reduced salary sacrifice capacity of $11,700 (ie $25,000 – $13,300) and taxation saving of $1,200.

Each and every year you delay your planning, you forgo an opportunity to increase your superannuation balance may limit your capacity to maintain or improve your standard of living during your retirement.  As an example, a person aged 45 with $120,000 in super and a planned retirement at 65, decides to make the maximum super concessional contribution of $25,000 each year until he is 65. This equates to a total of $500,000 (ie $25,000 x 20 years). This means the total capital ignoring growth for his retirement will be $620,000 (ie the original $120,000 + $500,000). It is important to note that the savings needed within super to provide $100,000 per annum at retirement at 65, for a couple, is $1,886,000 [3].

It’s not all bad news, from 1 July 2018 the Government has introduced a “Catch up concessional contribution cap”. If you have a Total Superannuation Balance of less than $500,000 on 30 June of the previous financial year you may be entitled to contribute more than the concessional contributions cap of $25,000 and make additional concessional contributions for any unused amounts. Some of the key facts include:

  • The first year you will be entitled to carry forward unused amounts is the 2019/20 financial years.
  • Unused amounts are available for a maximum of 5 years, and after this period will expire.
  • The 2019/20 financial year will be the first year you can make additional concessional contributions for any unused amounts.

For example: If your unused concessional contributions cap amount for the 2019-20 financial year was $11,700, during the 2020/21 financial year your total concessional contribution cap would be $36,700 (ie $11,700 plus $25,000).

The “Catch up concessional contribution cap” will help Australian save for their retirement, however, it is important to note that the earlier you start additional contributions, the better your standard of living in retirement will be.

So what is next?

Seek advice and ensure you have a personalised plan that is based on what your retirement will look like, how much you will need to live on and how long will it last. This plan needs to be reviewed on an annual basis to ensure you are on track and remain accountable towards achieving your retirement goals.

Article written by Damian Hearn, WealthPartners Specialist Adviser


[1] From 1 July 2012, individuals with total earnings greater than $300,000 have to pay additional tax of 15% on concessional contributions. From 1 July 2017, the total earnings threshold reduces from $300,000 to $250,000.

[2] Assumes personal marginal tax rate of 39% (including Medicare Levy 2%) and a super fund tax rate on contributions of 15%

[3] At a 80% confidence level. Source: SMSF Retirement Insights. Are trustees prepared for retirement? Produced by SMSF Association and Accurium. Volume 4 July 2016