How to beat regulators on the $1.6 million cap limit on superannuation

If you have more than $1.6 million in super, presently you might find that you are unable to make any further after-tax contributions (non-concessional contributions) into your super.

This cap limit is based on a per person limit and was introduced as a result of the government’s idea of restricting how much one person can have in their super at retirement at a reduced tax rate of 0%.

In essence, if you have $1.6 million in super and are drawing an income stream, you might find that this is taxed at a 0% tax rate on any income, capital gains or earnings within the super fund. Any amounts that sit above this limit of $1.6 million could be taxed at 15%.

This legislation was introduced to target people who normally squirrel away larger amounts into super in the lead-up to retirement.

We often find a lot of people who are 50 years or older naturally start to think about super and retirement, and tend to stuff larger amounts into their super in the lead-up. This legislation acts as a natural headwind to this late ‘mercy dash’ towards retirement saving.

So, what can be done about this limit if you find you are hitting the $1.6 million brick wall?

Here are a couple of suggestions:

  1. The cap relates to $1.6 million per person, so if you have a partner who sits under this cap you could simply push some of your funds over to them. To do this, however, a range of complexities must be considered to see if you can step through this door.
  1. Starting early can help, too. If you think about how much you will put into super over your working life, for most of us there is a ‘bulge’ at the end, due to rapid savings that take place in the years approaching retirement. By smoothing the contribution amounts over a longer time, it allows you to maximise the power of compounding this capital. Simply by starting contributions earlier could allow you to smash through the $1.6 million cap limit without breaking a sweat. Of course, before you jump into this option you need to consider the trade-offs, such as less access to capital or paying off your mortgage sooner.

These are just a couple of options we look at when coming up against this problem. We often use a range of other solutions for clients who are contemplating this issue.

Like any tax problem, remember what Kerry Packer famously said:

“I am not evading tax in any way, shape or form. Now of course I am minimizing my tax and if anybody in this country doesn’t minimize their tax they want their head read. As a government I can tell you you’re not spending it that well that we should be paying extra.”

Unlike the complex tax problems of a billionaire such as the late Kerry Packer, however, this strategy is fairly simple in comparison: to simply achieve the objective of eliminating the possibility of 15% tax being paid on your superannuation.

Like any great investment or retirement planning strategy, before you jump in and try to do this yourself, please seek professional guidance from a suitably qualified financial planner and, of course, I recommend AJ Financial Planning.

How can I tell if my super fund provider is in financial difficulty?

I recently reviewed Media Super’s Annual Report after reading a media article that reported them purchasing a 429-year-old violin as an investment. I thought this was an odd investment for a regulated super fund. Was this a responsible decision given the opaque market of collectables and the high transactional costs associated with such investments? And, how did this get past APRA? It triggered me to investigate Media Super’s investment policy.

At AJ Financial Planning, we spend a lot of time digging around in annual reports so I decided Media Super’s might provide some insight in their investment strategy.  Despite being pretty heavy documents, annual reports traditionally follow a simple format for listed companies. However, I soon realised that Media Super’s report was particularly different to that of a normal listed company.

Whilst looking for the investment report, I noticed that all the financials for this company were crammed into page 78 of the 80-page document. The report also bundles members’ assets in with their financial positions, making evaluation of the fund’s business achievements and solvency even more difficult to accurately determine.

As I read the report, I could not help but wonder why this financial information wasn’t featured more prominent in the earlier pages of the document. After all, an annual report is supposed to provide peace of mind to members of the super fund that the business is solvent and operating in an appropriate manner.

So, where does Media Super’s business really sit? Here is an extract of the profit and loss statements from this report from their 2018 annual report.

As you can see, there is not a heap of detail, but I noticed that the fund, not the members, appears to have made a loss of $14,896,000 in 2018. I went back and looked at the 2017 report, and this recorded an even larger loss of $20,966,000. Looking at these numbers, I would have thought the directors would want to spend some time explaining these losses – if they have been perhaps misinterpreted in some way.

Media Super has reported however that they have $40,099,000 in net assets, in addition to the trustee operating account, reserves and operation risk reserve, so they are not about to run out of money tomorrow.

But it does raise a more serious question about the regulated format of the annual reports a super fund produces and the role ASIC and APRA have in evaluating if the reports provide members with enough necessary information about the solvency of the company and also the performance of the fund’s investment choices.

So next time you are considering switching or looking at your super fund provider, you might want to look beyond the investment returns of the fund and think about whether the provider is actually making a profit or loss. Equally, it might also be a concern if the fund appears to be too profitable, as this could be an early warning sign that they are gouging their members’ contributions.

Like all great investment ideas, it is important that you seek professional advice from a practising financial planner before making any changes to your superannuation fund and, of course, I recommend you contact us at AJ Financial Planning.

Which would you prefer: a 7% or 12% return on your super?

It seems like a simple enough question. If you had a balance investment option in your super, would you choose a 7% or 12% return? Yet, before you decide it’s a no-brainer, it’s worth probing a little deeper into what could cause this 5% variance, as the reporting returns are not standardised.

Let me explain.

Using the mortgage industry as an example, when you consider look at taking out a home loan, the lender will normally quote two interest rates. The first is the principal interest rate, which might be around 4.86%. However, right next to it will be the ‘principal and interest comparison rate’, which might be around 5.25%.

You might reasonably ask, what do home loan interest rates have in common with superannuation?

Well, home loan providers have historically been really great at disguising the real cost of a mortgage. Even today, they might advertise a very cheap interest rate, but then they load up the product with fees throughout the life the loan, or top and tail it with some expensive loan application or exit fees. A comparison rate was introduced as a way for loan applicants to quickly determine the total costs of a loan, by factoring in most of the fees and charges incurred during the life of the loan. Essentially, it allows lenders to easily make an informed, like-for-like comparison of the true costs of this financial product.

The issue with superannuation is there is no standardised reporting or common ground. Personally, I believe that for the ‘Mysuper’ option, standardised reporting is well overdue. The government introduced these low-cost, default investment products were introduced into the superannuation industry to enable consumers to easily select which investment option might be best for them, given a range of variables.

So, getting back to the 7% or 12% question; it is important that you understand the drivers for such discrepancies. It’s probably time that government decided to introduce changes to avoid the barely disguised tricks of superannuation funds, such as calling a product a ‘balance fund’, but investing the assets at a growth asset allocation (refer to our recent article, Could Your Hostplus Index Balanced Fund be a disappointment?). They might also provide a great return, but then hike up the administrative fee structure and other costs that might not be reflected in the net return reported.

So, similar to the mortgage industry, super funds get up to a number of shenanigans. For financial professionals and expert investors, these are often easily spotted, but to the majority of average, day-to-day investors, it is a bit of a minefield.

I feel that the idea of a comparison rate return is a sensible approach, as if super funds are over-inflating an investment option with risky assets, they would be required to standardise the returns. ASIC and/or APRA could set strict formulas between growth-based assets and defensive assets.

In addition, all funds would be required to adjust their reported return as if the asset allocation was a true balanced investment, which would be 50/50 between growth-based asset to defensive assets. This would mean that investors would have a fairer way to assess the true merits of a super fund, and also be able to have a sensible discussion on their overall net return.

Until this occurs, however, investors will continue to be bamboozled by the returns offered by super funds.

Before selecting an investment option or super fund, it’s important that you seek suitable advice from a qualified, practising financial planner and, of course, I recommend AJ Financial Planning. Contact us today.

Is it better to retire on a $350k super fund, or a $900k super fund balance?

When it comes to retirement most people believe more is best, but is this always the case? Have the Centrelink changes that came into effect last year distorted reality; has the $350k super fund become the new $900k – without all the extra effort of squirrelling away so much for retirement?

Let’s assume we know two couples who are about to retire. One couple has a balance of $350k; the other has $900k. Both couples want a modest living standard in retirement, with an income stream of around $50k p.a.

The first couple with a combined balance of $350k can expect to receive an income stream of around $21,000 p.a. Potentially, they might also receive the Age Pension if their combined assets – excluding their home – sits under the threshold of $380,500. The projected Age Pension is likely to pay them a combined income of $35,573. Thus, they will end up with a total combined income of $56,573. It is likely that at a 6% drawdown rate, their superannuation will not be eroded too fast, so it should be possible for them to keep pace with inflation during their remaining lifetime.

In addition to receiving the Aged Pension, this couple will also receive all the benefits and concessions that normally come with it, such as discounts on utilities, medicines, etc.

The second couple has a combined super balance of $900k. Like the first couple, they own their own home. But as their combined asset balance exceeds the maximum Centrelink threshold of $837,000, they are not eligible for the Age Pension.

This couple will commence an income stream from their superannuation balance and, assuming a similar 6% drawdown limit, they will be eligible to draw a combined retirement income of $54,000 p.a. If their super fund’s performance remains reasonable, this should also last them until life expectancy and keep pace with inflation.

However, being over the Centrelink threshold means that this couple is not eligible for any of the discounts and benefits that normally accompany the Age Pension, although they will also not be affected by any government changes that might occur in the future to Centrelink thresholds.

They could also draw down a higher income stream earlier in their retirement, to enjoy travel and entertainment, etc. Then as they age their need for cashflow might not be as great, so they can gradually ‘ease off the throttle’ and reduce their balance to the $350k mark, and be in a similar situation to the first couple.

So the next time you are feeling a little underwhelmed about your retirement picture, it’s important to give consideration to all options that might be available to you. Sometimes, bigger may not be better. Or, you might be better off sitting at the $900k balance, possibly spending the difference on home improvements, travel, a new car etc. Later you could drop to the Age Pension limit, and even if you receive just $1 from the Age Pension, it still means you qualify to enjoy the other benefits that come with this government offering.

Before delving into a retirement strategy, it’s important you take your personal situation into account and seek advice from a qualified financial planning professional. Of course, we recommend AJ Financial Planning.

Navigating retirement funding: Is superannuation such a great idea?

Superannuation and retirement have always gone hand in hand. Yet recent budget announcements around taxation, contribution caps and other proposed changes have caused a stir and understandably, some Australians may be reconsidering the merits of superannuation.

Presently, retiree couples with a low income or seniors tax offset can each earn around $74,000–$83,580 p.a. before they start paying any taxation on income outside of their superannuation environment.

Let’s say, for example, that a couple’s capital was all invested in a term deposit. Based on today’s interest rates, they could each have around $2.7 million in a term deposit before paying any taxation.

Alternatively, if they invested their money in a share portfolio, each portfolio would have to be worth around $1.67 million before they had to pay any taxation.

So the question is, with all the confounding complexities around super; is it really worth the headache?

The other question is, will the proposed changes have much of an impact on the general retirement population? The budget announced a $1.67 million cap per person on a superannuation fund (combined $3,340,000 per couple) before any taxation comes into play. Anything above this may be subject to a 15% accumulation taxation on earnings.

For most Australians, this excess will likely move from their superannuation into their personal names once the measures are potentially introduced.

As you can see by these limits, for most retirees around Australia, taxation will only start to be a factor if they hold more than $4.94 million in combined assets, excluding their own home (both inside and outside of super).

On the other hand, if you only have a couple of hundred thousand in superannuation at retirement, does it make sense to have a superannuation fund with all the hassle of fees, regulation changes and complexities, etc., or are you better off just having the money invested in your own name?

Part of this answer will depend on the capital gains element of your portfolio, i.e., how much is generated on an ongoing or a forecasted basis in the future. The biggest benefit for superannuation is that if it is in pension phase, under the proposed limits from a capital gains standpoint it will be 100% tax-free.

Moving forward, I suspect that most people will look to manage their legislation risk—the risk of the government changing their mind—by holding some assets inside of superannuation, and some outside of superannuation.

This will also assist with distributing the tax base across both structures, and keeping a foot in both camps should there be any changes.

However, like most strategic financial planning, you have to consider all the above factors in context to your personal situation. You will also need to consider the benefits of salary sacrifice contribution into superannuation, or deductible contributions, as well as a whole range of other factors in determining which path is best.

Please also remember that before embarking on any investment or strategic financial planning decisions, you should always seek professional guidance from a licensed financial planner. Of course, I recommend AJ Financial Planning.

50’s and super – what’s important to know…..

I was recently went around the corner from my office to eat at an Italian restaurant. It was one of those restaurants where the entire menu is in Italian.  Now my Italian is sketchy at the best of times, but what was a little more tricky was the menu items.  Normally when you look at a menu you can quickly identify a couple fail safe options, this place however had me stumped. This restaurant was one of those places when I read the menu and went “Gosh! I can’t find anything!”  Then when I looked more carefully some of the items listed start out sounding really nice… but then halfway through the description they added something funky!! So what’s this got to do with super and being in your 50’s? Stay with me….. When it comes to your 50’s and superannuation you start to get access to a whole heap of options for your consideration. However, like the Italian restaurant, sometimes they all sound interesting initially but once you get into the finer detail you need to make sure that you are not getting anything unexpected. So that you don’t end up feeling stumped like I did at the Italian restaurant, I thought I would give you a couple of tips on what you should be considering: 1. If you are in your 50’s and have some debt, you may be better of salary sacrificing the income into super than paying down the debt.  The main reasons are:

  • By salary sacrificing the money into super you may be taxed less
  • At retirement you could draw a lump sum out and clear the debt out.

There are a heap of variables with this approach and it is important to crunch the numbers.  You may find that this may save you heap of tax and allow you to clear the debt too. 2. If you have reached preservation age and can access your superannuation, one thing you might question is do you either draw an income stream, a lump sum, or do nothing at all? For some it makes a lot of sense to commence a transition to retirement strategy.  This strategy is a way to reduce your overall tax position considerably.  Your super fund also becomes 100% tax free too. However if you are a high income earner, you may decide to hold off and start this until you hit age 60 years old. If you are retired you may choose to take a lump sum rather than an income stream as this may save you tax too due to a different tax treatment of lump sums over income streams. Once you reached a condition of release which for some can be as early as age 55, there are a heap of options available to you with your superannuation.  It is important to make sure you are maximising this as much as possible to reduce your tax, position yourself for retirement and maximise your capital. These points above are just a few of the things we consider when we look at your overall financial position to develop a Financial Plan. So unlike my restaurant experience, there is help available to make sure you aren’t getting anything unexpected in your financial future. Like all great ideas with Financial Planning however, it is important that you obtain professional advice before implementing any strategy – and we would of course recommend that you speak with our team at AJ Financial Planning.

How to know if a Self Managed Super Fund is right for you?

The Self Managed Super Fund (SMSF) sector is the fastest growing part of the superannuation industry as many Australians are choosing the ‘do-it-yourself’ route of an SMSF rather than your more traditional personal superannuation accounts and platforms. If you are considering a SMSF there are a few things to consider…. Is my balance high enough? Technically there is no real minimum for starting a SMSF, but in saying that, the ongoing costs make it an uneconomical option for lower balances. So what should my minimum balance be to start a SMSF? This question really depends a lot on what your accountant charges. Every year your SMSF needs to pay a $321 fee to the ATO which is a fixed cost. You will also need to pay for an external audit (that your accountant will usually organise) and your accountant will need to complete the annual reports and tax returns. These can cost anywhere from as low as $1,000 for a very simple SMSF to as much as $5,000 for more complex SMSFs with high charging accountants. Things that affect the accounting cost for an SMSF include:

  • Number of transactions in the SMSF, both in the cash account and in relation to purchases and sales
  • Number of different investments
  • If your accountant is able to automate transactions and reporting by having managed fund platforms or dividend recording software
  • If you are drawing a pension form the account
  • If you are contributing to the account
  • Type of investments e.g. property investments can be more complicated

So back to the question of how much do you need to justify the accounting costs?  Fees on superannuation funds typically range from 0.5% – 2.5% per year. To keep the numbers simple, if your current super fund charges 1% in fees and your accountant will charge you $1,000 to do the SMSF accounting then you could justify an SMSF with a balance of $100,000 or more. If your accountant will charge $3,000 and your current fund charges 1% then you probably want to have around $300,000 in super before the SMSF will be a cheaper fee option. Are you prepared for the responsibilities? With a SMSF you will be responsible for the decisions relating to your investments and for the ongoing compliance of the fund. If you are the type of person that just wants to let their super sit there and not look at the investments more than once a year, then a SMSF may not be for you – unless of course you use a financial adviser to manage your SMSF for you! So if you like to take control and take an active part of managing your money (with or without the assistance of a financial adviser) then a SMSF can provide this for you. Will an SMSF give me something that my current super fund can’t? If there are specific investments that you want to access, a SMSF is often the only realistic option for you. If you want to use funds in your superannuation to purchase direct property, direct international shares, precious metals and other non-traditional investments, you will usually find that you need to set up a SMSF. If you are happy only investing in managed funds with perhaps a few direct Australian shares, then you can often achieve the same result with a personal superannuation fund that has these options. For larger balances there may be a cost saving even if you are going to invest in managed funds and Australian shares, but you will have to do the sums. Still not sure if an SMSF is for you? If you would like one of the financial advisers from AJ Financial Planning to assess your personal situation and discuss whether an SMSF is appropriate for you, please email info@ajfp.com.au or give us a call on 03 9077 0277 and we can organise an initial meeting for no cost to you!