Money Monday: Is super still so super?

Superannuation has been in the news following the announcement of possible changes in the May 2016 Federal Budget.  I have read a bit about the changes, but I must say it makes my eyes glaze over and I find it difficult to read most reports to the end (and I actually LIKE reading about financial topics).  So I was happy to have the opportunity to clarify some of the changes with MLC financial planner Michael Miller.

I asked Michael a few questions about superannuation and what the changes mean to, say, someone in the workforce like me. Now that am well on the way to paying off my mortgage, I am interested in exploring whether or not I should start making additional voluntary contributions to super.  But the changes in the media kind of scared me.  I asked Michael the following four questions:

 1.    What are the main changes flagged for superannuation contributions?

The main changes that have been made to super contributions in the recent Budget are a reduction in the amount you can contribute each year where you receive an upfront tax concession (these are called concessional contributions, which are often accessed via a salary sacrifice agreement with your employer).

These have come down to $25,000 per annum regardless of your age, starting from 1 July 2017, and include the value of any employer super contributions.

Another change is on additional lump sum contributions that are made without an upfront tax concession. These are called non-concessional contributions. Previously you were able to make up to $180,000 of these contributions each year. The proposal however is to put in place a lifetime limit of $500,000 and this limit will include all contributions made since 1 July 2007, so people who made large one-off contributions in the past might not be able to make any more in the future.

It’s really important to be aware however that these were proposals in the Budget, and largely haven’t been passed into law. This means that we don’t know the exact form of the rules and how they will be applied.

2.   Would you recommend making large additional, voluntary contributions to a superannuation fund?  Why?  Why not?

Generally, super has been a really low-tax environment to invest money that you don’t need until you’re retired.

Right now, the uncertainty around limits to contributions and the potential for the proposed limits to count contributions made before the laws are enacted mean it might not be right to make a large additional contribution to super.

Superannuation is just the vehicle though. If you haven’t already funded your retirement fully then it’s absolutely a great idea to set aside extra funds towards being able to do so – even if it’s not in super.

3.  Are women disadvantaged by the compulsory superannuation scheme?  Why?  Why not?

Many of the tax concessions that have applied to money invested in super favour long periods of continuous contributions. This isn’t a pattern that is realistic for many people who have longer periods where they are employed part-time or out of paid employment altogether, because they are the primary caregiver for a child, or parent.

More often than not – it has historically been women who perform that role of caregiver for a child or parent, and this is well represented in the statistics that show lower average super balances on retirement for women.

4.  What super issues are there to consider for a couple that are marrying?  Having children? Separating/divorcing?

The benefit of my work as a financial planner is that I get to work with a huge number of retirees who are drawing on their superannuation on a regular basis to fund their living expenses now that they’ve stopped work. This of course makes me acutely aware that superannuation is a real and valuable asset.

We also work a lot with clients who are going through transitions in their life – and you’ve really hit the nail on the head with some of the big life transitions there in marriage, starting a family, or going through a separation. For many of these clients, retirement seems like a completely distant proposition that will never ever come, so they don’t really properly recognise superannuation as an asset when making their other financial decisions.

For couples that are marrying and having children, they should be considering whether they are starting with large imbalances between their accounts, and what they can do to fix this up. Another consideration might be whether they can just get started on a small additional contribution, as something they can build on over time and as cashflow improves.

For couples that are separating, it’s important that everybody recognises the value of the super as an asset. If the proposed changes to contribution limits go through this can be increasingly important as it might be difficult to rebuild the super balance. Having funds available for things like owning a home are important but there may be a balance to be struck and that might mean having some super transferred.

Do you consider superannuation an important investment?  Why? Why not?  Are you planning to change your investment strategy regarding superannuation contributions as a result of the proposed changes to superannuation?  If so, I would love to hear from you.

Ms Frugal Ears is working with Michael Miller from MLC on posts about investment, saving and financial planning. Do you have a question for Ms Frugal Ears? Or for Michael? Please let me know and I will do my best to blog an answer.