As politicians present their case for the election, it is an ideal opportunity to consider some helpful changes that would improve the superannuation and retirement system in Australia.
Remove the ‘work test’ to simplify contribution rules
The current work test is inflexible and unrealistic in its limitation on contributions, given the superannuation system’s intended role as a retirement savings vehicle. Under the current system, advising people to increase their contributions to superannuation is confounded by the Government’s work test. Removing the work test would encourage more contributions after age 65 from an ageing workforce that is likely to be working well into their 60s.
Currently, people who are 65 years and over need to satisfy a work test before they are able to make personal contributions into super. However, a super fund can accept any contributions made by a person under age 65, regardless of employment status. Once a person reaches age 65, a super fund can only accept personal super contributions provided the member has been employed on at least a part-time basis.
High income earners: allow higher concessional contributions
Last year’s Federal Budget saw the higher concessional contributions cap of $50,000 for individuals aged 50 and over with superannuation balances below $500,000 deferred to 1 July 2014.
All taxpayers, regardless of age, are subject to a concessional contributions cap of $25,000 for the 2012/13 and 2013/14 income years. In 2014/15, the general cap is expected to increase to $30,000 through indexation, and the higher cap would then commence at $55,000 for eligible taxpayers aged 50 and over.
Ideally, all superannuation members of any age should be able to access a much higher concessional contribution limit than is currently allowed. Supporting additional higher concessional contributions from members under 50 years of age would contribute significantly to focusing people on funding their own retirement.
An increase in the amount of concessional contributions during a transition to retirement strategy should be matched with an increase in the maximum drawdown allowed. Currently 10% per year maximum can be drawn from a non-commutable pension when a transition to retirement strategy is adopted.
An increase in the concessional/non-concessional contribution cap would also benefit high income earners with self-managed super funds, who wish to transfer assets in-specie, for example listed shares or real property; and for members who receive an inheritance or wish to make substantial catch-up payments into super prior to retirement.
Non-concessional contributions are currently capped at $150,000 per person per year. To accommodate larger contributions, people under age 65 are able to bring forward future entitlements to two years’ worth of contributions, giving them a cap of $450,000 over three years. People aged 65 to 74 will only have a non-concessional cap of $150,000 per year, provided they satisfy the work test.
An exemption from the non-concessional limit for those making contributions on behalf of their children is also worth considering as a further enticement to encourage long-term retirement savings.
Nest week, we will look at more improvements to add to the wish list.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
