When the major superannuation changes came into law in 2017, most of the focus was on the $1.6M transfer balance cap for pension members. However, one significant change that may not necessarily hurt too many people on the cusp of retirement but will affect younger “wealth accumulators”, is the reduction in the concessional superannuation contribution cap to $25K per annum. This cap previously sat at $30K for those under 50 yrs and $35K for those over 50 yrs.
Concessional superannuation contributions include employer mandated contributions (ie 9.5% of your salary), and pre-tax salary sacrifice contributions. These contributions are taxed at 15% by your superannuation fund (or 30% if you are a “high income earner”) so provide a tax concession where your marginal rate of tax is higher.
With the reduction in this cap, there is now a question mark as to whether you can accumulate a meaningful balance at retirement without making after-tax contributions (ie non-concessional).
Looking at some modelling; if we assume someone is employed consistently from age 25 to age 60, with a starting salary of $75k (indexed) and no salary sacrifice until age 45 (when they begin salary sacrificing up to the $25k cap), they will accumulate around $1m (today dollars) in superannuation by age 60.
If you retired today with $1m in super, and your living expenses were $100k (indexed), then your superannuation balance would not last to your life expectancy. In this circumstance you would need to rely on the Age Pension later in life (not something that we would be recommending clients work towards!).
There are obviously several assumptions with this modelling, and it is also only based on one person. However, noting that half of us will live beyond our life expectancies, $1m doesn’t go that far these days.
So, what are the implications of this reduced concessional contribution cap? Firstly, the reality is that most people will need to consider making additional non-concessional superannuation contributions if they want to build up their superannuation to a more satisfactory level. Given that the preservation rules mean you lose access to this money for a period by contributing it to superannuation, you may not wish to consider this strategy until you are closer to your retirement age (ie access age).
Building a “retirement plan” which includes assets in addition to superannuation is also something that needs to be considered. While investing outside superannuation may not be as tax effective, there are a range of alternative wealth accumulation structures available (eg trusts, companies and investment bonds) that may have other benefits, such as a high-level of control and access.
There are only three things that you can influence to change the amount you will have in superannuation at retirement:
- the level of contributions you make,
- the earnings you achieve (ie your investment strategy) and
- the costs you incur.
Given the latest rule changes significantly crimp the amount of contributions you can make, it may be wise to renew your focus on the fees and charges you incur. These costs include administration fees charged by your super fund, investment management fees charged by the fund managers employed in your investment strategy, and life insurance premiums paid funded from your superannuation account.
Fund manager fees are typically calculated as a percentage of the amount invested. These fees are sometimes hidden and can be quite expensive (for example 1%+ per annum per fund manager).
Given most people have some level of life insurance inside their super, the other cost to watch is the insurance premiums. While insurance premiums inside super are generally tax deductible, once you get over age 50 the cost of your insurance premiums can really “take off” and can significantly erode your contributions. By this stage of life the risks you are trying to protect should have reduced substantially (as you should have accumulated some wealth already), so it is worth re-evaluating your life insurance needs around this time.
Superannuation caps were introduced to reduce the amount of money you could accumulate in the concessionally taxed environment. For those of working and someway off retirement, this restriction is something that needs to be factored into your wealth accumulation plan. More than ever, it is likely that your plan may need to become broader than a simple superannuation retirement strategy.