Australia’s Superannuation laws have created a ‘Use It or Lose It’ landscape for retirees

The creation and implementation of Superannuation was one of the most significant public policies enacted by the Federal Government in the last century, fundamentally changing how we all prepare for our retirement while creating a multi-trillion-dollar industry. Subsequent policy changes to how we save for our time after work have had major impacts on the practicality of superannuation and has created a new landscape for those approaching retirement.

You may recall the Reasonable Benefits Limits (RBL’s) era, that started in 1994.  This placed a limit on building up concessionally taxed superannuation benefits, based on a multiple of your salary near retirement. The removal of those caps in 2007 allowed individuals to build unlimited wealth in the concessional tax environment of within which super exists, while limiting how much individuals could contribute to their accounts each year.

From 1 July 2017, a total, indexed superannuation balance cap was introduced of $1.6m. This change was motivated largely by the Government’s desire to in some way limit the amount of superannuation assets one can rapidly build as they approach retirement, whereby earnings on those assets are taxed at a concessional rate of no more than 15%.  Don’t forget the Labor Government published a proposal at the time with a similar goal, using a different method - using a maximum annual tax-free earnings cap – likely resulting in a similar asset limit overall.

So, other than owning your own home, superannuation contributions are one of the last remaining options to build assets in a tax-free environment, by using up to $1.6m of superannuation assets to commence an income stream from age 60 onwards.

Unfortunately, the Government concurrently introduced lower super contribution caps, making it even harder to build up that ‘golden egg’ for retirement.

Each super account holder now faces an individual ‘lifetime’ superannuation contribution cap until age 65, after which time, individual tests begin, including ‘work test’ requirements.  Each year that passes where you do not take advantage of these contribution limits, the entitlement is forfeited, meaning you lose another year in which you can build wealth in superannuation for retirement.  You ultimately need to make a conscious decision each year if you wish to “use it, or lose it”.

Most of us will go through our working life with very little extra money to contribute to our super until we approach the horizon of our working lives. Others may be in a more fortunate position to start contributing additional amounts into their super accounts earlier in life, knowing they cannot be accessed until at least age 60, but this is an exception to the rule.

Given the additional complexity introduced in 2017, there’s some important questions you should know the answer to as you approach retirement: you may need to work with your Wealth Adviser to decide:

  1. Do you have the potential to reach the ‘golden egg’ limit of $1.6m by retirement?

  2. What are the advantages of exceeding the $1.6m by retirement?

  3. Are you eligible for the small business tax retirement exemptions to build up superannuation assets?

  4. Should you develop strategies to help reduce or potentially eliminate the impact of any future estate taxes lying dormant in your superannuation funds? Yes, a death tax does still exist in superannuation!

Super is for most the second-largest financial asset behind their home, and it is an asset facing increasingly complex taxation policies. Combine that with trying to find the best person to nurture the money earmarked for retirement and it is a topic that really should be approached with the help of a dedicated financial advisor or wealth manager.

Frank Tesoriero, Partner - Financial Planning