Just ten years ago, Treasurer Peter Costello made substantial reforms that were supposed to set superannuation in place as the cornerstone of our retirement savings in Australia. Who would have thought then that it would be another Liberal government that would turn those reforms upside down?
Treasurer Scott Morrison has made it clear that there is now a new set of rules for superannuation. As far as he is concerned, the wealthy can look after themselves. The main purpose of superannuation will simply be to provide retirees with an income equivalent to two-thirds of average earnings. All the reductions in contribution caps are formulated around those principles.
One of the biggest “reforms” is the capping of after-tax contributions to just $500,000, to take effect from budget night. The sting in the tail is that this number takes into account all non-concessional contributions made since 1 July 2007. When I first read that, I thought it was a misprint – surely they meant 2017 – but it’s no misprint, it’s all the contributions you have made with after-tax dollars over the last decade! Not only that, but the new cap applies over your lifetime – that really is a big change.
This will have a side effect which I am sure is not unintended – it will wipe out a common strategy, in which retirees have been reducing the component of the superannuation that is liable to a 17% tax on death if left to a non-dependent, by making tax-free withdrawals from their superannuation and then re-contributing them as a non-concessional contribution.
As I predicted, transition to retirement pensions will become much less effective as a wealth-building strategy. From 1 July 2017 a person who has reached preservation age will still be able to work while making withdrawals from their super, but the fund will remain in accumulation mode and pay 15% on its income. No longer will the fund become an exempt pension fund. I guess making withdrawals while you are still working will be a good strategy for those who decide they can put their superannuation funds to better use outside the ever-changing superannuation environment.