The outcry about the changes to superannuation announced in the 2016 budget was both predictable and understandable. The SMSF Association went to considerable lengths to articulate, both in public and private, its concerns about the changes, as well as the positive benefits of some measures and the impact they would have on people’s retirement income strategies.
But that said, the association remains firmly of the view superannuation remains the primary and best retirement savings vehicle, in the accumulation, transition-to-retirement and pension phases, and within super, the SMSF sector is the best option for people wanting to be self-sufficient in retirement.
Despite the latest bout of changes to super, SMSFs still give trustees and members the flexibility, control and independence to make the decisions that are relevant to their retirement income strategies. Indeed, it is precisely because of these characteristics SMSFs are even better positioned as a retirement savings vehicle in the wake of the latest changes.
It’s worthwhile for SMSF trustees and members to ruminate on what our leading Australian system still has to offer – and, where necessary, get specialist advice to ensure they are aware of all the options. The goalposts have moved, so even for those SMSF trustees who have typically run their own funds, now may be a good time to get a second opinion. Individuals do it with their physical health; why not their financial health?
Remember, too, the 2016 budget changes have invariably complicated the system even more, so the need for greater planning becomes even more imperative.
Although the media focus following the budget has been on the negatives, it is important to point out there were some positives in the document – many of which the SMSF Association has been advocating for years.
From 1 July 2017, two important measures will take effect that will benefit SMSF members, provided they become law, a proviso that needs to be added to many of the measures announced in the budget:
- Everyone under 75 will be able to claim an income tax deduction for personal contributions made to a super fund, effectively removing the 10 per cent rule. Small businesses will be a particular beneficiary of this measure as it will greatly simplify the system;
- Removal of the requirement a person aged between 65 and 74 meets a work test before making concessional or non-concessional contributions and allowing people to make contributions to a spouse aged under 75 without their spouse having to meet the work test.
These are both long overdue changes that will have the positive effect of reducing compliance costs for SMSFs.
The budget also proposed to give the people with superannuation balances under $500,000 the ability to use any unused concessional cap balances over a five-year timespan. For those who have endured broken work patterns, small business people coping with fluctuating business cycles, or the farming community, this initiative will be welcomed for improving the flexibility of the concessional contribution regime.
However, this needed reform remains constricted, being limited to people with superannuation balances below $500,000. This threshold needs to be raised as this sum does not provide adequately for those wanting to be self-sufficient after factoring in issues of longevity and health, and certainly not in an investment environment where interest rates are at historical lows.
When Future Fund chairman Peter Costello publicly argues that the $117 billion sovereign wealth fund will have to lower its return target from inflation plus 5 per cent because of the low interest rate and low inflation environment, then the difficulty of an SMSF generating enough income from $500,000 for its members to live comfortably in retirement is self-evident.
SMSFs also need to move quickly to take advantage of the 1 July 2017 start date for some measures. For those individuals aged 50-plus and in the financial position to do so, they should put up to $35,000 into their SMSF this financial year and next before the axe falls and the cap drops to $25,000 at the start of the 2018 financial year.
In a similar vein, those still in the workforce need to take the time to determine how much in post-tax earnings they have put into super as any contributions made since then will count towards the new $500,000 lifetime post-tax limit.
The latest Mercer survey comparing super systems worldwide rated Australia third best. Indeed, we have always been ranked in the top five since the survey began in 2009. It’s an enviable record and one worth remembering when changes to super have critics questioning its intrinsic value.