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So 2017 has already started. And this year will be a year of very significant change for Australia’s superannuation sector. Only a few short years ago our superannuation system was generally acclaimed as an excellent example of farsighted, bipartisan policy-making that would position us as a leader amongst OECD nations in managing the challenges of an ageing population.

O, for Those Innocent, Carefree Days

Today, the super system is hotly contested. Revenue-hungry governments of all colours are irresistibly attracted to the $2.15 trillion in funds under management (FUM). As usual, investors will be left to foot the bill. Indeed, the changes that will be implemented this year will scuttle many a retirement plan.

In this edition of Investment Enews we take a quick survey of Australia’s superannuation system and the most significant changes that are about to come into effect.

Superannuation Sector Survey

Since the compulsory Superannuation Guarantee (SG) was introduced by the Keating Labour government in 1992, the Australian superannuation system has grown both in size and in complexity. Initially, the system gained impetus from its connection with the trade union movement via the industrial ‘Accords’. This lead to rapid growth of the ‘industry’ or ‘not-for-profit’ superannuation fund sector. This sector was joined relatively quickly by big banks, who drew on their extensive networks and client bases to grow their own ‘retail’ funds. The ‘corporate’ fund sector, in which large employers created superannuation funds for their own employees, also played an important role.

It was not until the early 2000s that policy-makers noticed the most surprising thing about the superannuation sector – the rise of the selfmanaged superannuation fund (SMSF). Indeed, former-Prime Minister Keating has candidly confessed that neither he nor any of the architects of the original SG system ever imagined that SMSFs would play a significant role in the retirement savings system.

Today, the SMSF sector holds $624 billion in assets under management and is the largest single part of the superannuation system. Indeed, it holds a whopping $80 billion more than the retail fund sector, which is the second largest component of the superannuation system. In itself, the SMSF sector holds 29.6% of Australia’s superannuation assets.

The development of Australia’s superannuation system has continued to garner significant recognition over the years. The Melbourne Mercer Global Pension Index rates Australia’s pension system as one of the world’s best, behind only Denmark and the Netherlands.

Despite this success, there are some longstanding debates within Australia’s system, especially around the role of SMSFs. As long time readers of Investor Enews will recall, there have been those who have questioned the wisdom of allowing individuals to manage their own retirement assets. Some have suggested that many SMSF trustees are unqualified and prone to irrational decisions. In particular, some commentators have argued that SMSFs are taking on too much debt through ‘Limited Recourse Borrowing Arrangements’ (LRBAs) and are overexposing themselves to the residential property sector. A few years on, there is little to suggest that these are systemic issues. As at end of September 2016, Australian Taxation Office (ATO) statistics show SMSF exposure to LRBAs and residential property at just 3.8% and 4.21% of total SMSF FUM respectively. Importantly, neither is showing signs of any dramatic growth.

Of course, this is not to ignore individual cases of unwise investments in the SMSF sector. SMSF trustees have a considerable burden of responsibility and should always seek advice from an independent financial adviser in constructing their portfolios. On the other hand, it does dispel the notion of any systemic issue in these areas in the SMSF sector. As the chart below shows, the SMSF sector as a whole is highly diversified, with its two most significant allocations being to Australian shares (31.5%) and cash/term deposits (25.7%).

Superannuation Changes

Wherever investors hold their retirement assets, they are facing some significant changes in 2017. These changes have the potential to change retirement outcomes materially, so investors need to be very aware of them. When the changes were announced, the headlines focussed on the cap on assets held (tax-free) in pension phase at $1.6 million per person. Assets now held above this amount must be kept in accumulation and taxed at the (still concessional) rate of 15%. For couples with an SMSF, this makes the balancing of member benefits critical. It makes no sense to have one member with a very low balance, whilst the other exceeds the cap. Any additional contributions made should take this key feature into account and prioritise the member with the lower balance.

However, there is also a range of other changes that should be considered and discussed with your financial adviser.

CHANGE 1: Concessional Contributions – Last Chance to Take Advantage of the Existing Limits

The existing concessional contribution (CC) limits ($35,000 for the over-50s and $30,000 for the under-50s) apply for the rest of this financial year. From 1 July 2017, everyone will have the same CC limit of $25,000. And for many Australians, that will put retirement plans in jeopardy.

The obvious response is to make the most of CCs this financial year. If you can make contributions up to $30,000 or $35,000, consider doing so. But, whatever, you do, start planning now. Liaising with payroll and advisers at the last minute is a recipe for disaster. And remember that salary sacrifices can only be made on income that has not yet been earned.

Self-employed who don’t receive a salary from their business usually make contributions towards the end of the financial year. This time around, consider maximising your contributions to take advantage of the last opportunity at the higher limits.

CHANGE 2: Non-Concessional Contributions - Limits are Also Dropping

You’ll recall that the Coalition originally announced that the lifetime limit for non-concessional contributions (NCCs) would be $500,000. This limit was dropped during legislative negotiations and was replaced by an annual limit of NCCs of $100,000 (down from $180,000 previously). This means that the three-year “pullforward” rules now allow just $300,000 in NCCs, down from $540,000. And all of that is subject to the global superannuation balance limit of $1.6 million.

If you are able to make big contributions to super via NCCs and you’ve already got a considerable super balance, you’ll need to make those prior to 1 July. If you’re already over $1.6m, or these would take you over $1.6m, then at least you have got the money into the superannuation system - something you won’t be able to do after the new rules take effect.

You might have to move some of it back to accumulation/super on 1 July 2017. But there it will only be taxed at a maximum of 15 per cent. If you have considerable wealth outside of super, which will see you taxed at a higher rate than 15 per cent, then it may well make sense to get the money into super and pay superannuation levels of tax.

CHANGE 3: The end of Transition to Retirement?

Transition to retirement (TTR) strategies have long been a staple for investors, particularly those in the SMSF sector. However, from 1 July 2017, TTR pensions will be taxed at a maximum of 15 per cent until you qualify to convert that pension fund into an account-based pension (ABP).

If you are 65, you automatically receive an ABP and you won’t have to pay tax on the fund’s earnings again. However many people are sitting on TTR pensions, which will be taxed post 1 July 2017. One way of changing a TTR to an ABP would be to make sure your super fund is aware of when you change a job, post age 60.

There continue to be technical rules around TTRs. If you think that the strategies might benefit you, get some advice from a quality adviser.

CHANGE 4: Get to Know the SAPTO

Every change to the pension system brings some new acronyms to savour. SAPTO (Seniors and Pensions Tax Offset) may not be most pretty, but it could be an effective part of your retirement strategy going forward. SAPTO allows individuals over age 65 to earn up to $32,279 before paying tax outside of super. (Couples can earn $57,948 combined, or $28,974 each.)

This means that a member of a couple could have assets outside of super of $700,000, earning 4 per cent, and have earned $28,000 - under the SAPTO tax-free threshold. When this amount is added to the $1.6 million in super, this amounts to $2.3 million in assets before tax is paid on earnings.

When you consider that you will then also be able to utilise the accumulation part of your super fund to maximise your tax at 15%, there is still a very solid case for the structural advantages of our superannuation system as a savings vehicle.

How can La Trobe Financial Help?

La Trobe Financial has been providing loans and investment opportunities to Australian investors, including SMSF investors, for decades. Our 12 Month Term Account (currently paying monthly income of 5.20% p.a., variable) has been Money magazine’s “Best Mortgage Fund” for an unprecedented eight consecutive years. Its capital stability, market-leading monthly income and long track record make it an obvious choice for investors seeking to achieve their retirement goals in an increasingly complex environment.

Call our friendly and expert investor team for help and more information on 1800 818 818.

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This publication does not constitute financial advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek your own financial or other professional advice before acting or relying on any of the content.