Noel Whittaker's Blog Over the past week I’ve made three presentations to separate retiree groups, and from the questions being asked, it’s obvious many are still confused about superannuation. So today I’ll give you a brief overview, incorporating answers to many of their questions.
First the good news: there is no limit on the amount your superannuation can grow to. There are, however, limits on contributions both by amount and by age. Anybody may contribute to superannuation until age 67, but after that the contributor must pass a work test, which involves working for 40 hours over 30 consecutive days in the year the contribution is made. The May 2021 Budget proposed to abolish the work test for non-concessional contributions, effective from 1 July 2022. Once you reach 75 no more contributions are allowed except mandated employer contributions.
Tax-deductible contributions are limited to $25,000 a year, rising to $27,500 on 1 July due to indexation. These “concessional contributions” include contributions from all sources, including the employer compulsory contribution. There is a 15% tax on entry on these contributions, which rises to 30% for anyone whose adjusted taxable income (including salary sacrificed contributions) is over $250,000.
Non-deductible or “non-concessional” contributions come from after-tax dollars, and are limited to $100,000 a year now, rising to $110,000 on 1 July. There is no entry tax on these contributions, but no non-concessional contributions can be made if your superannuation balance at 30 June last year was in excess of $1.6 million ($1.7 million from 1 July). Depending on your age, previous contributions, and your total super balance, it may be possible to contribute up to $330,000 in one lump sum by using the “bring forward” rules.
The biggest confusion revealed by my seminar audiences was about the transfer balance cap. This restricts the amount you can transfer to pension mode from accumulation mode. The cap is currently $1.6 million, rising to $1.7 million on 1 July. Once you have used your transfer balance cap, no more money can be transferred to pension mode. But once the money is in pension mode, there is no limit on what it can grow to. For example, if you transferred $1.6 million to pension mode and the fund had a 20% year, you could find yourself with $1,920,000 in pension mode.
Once you are in pension mode, you are required to draw a minimum pension amount each year – this increases as you get older. For example, it’s 4% if you are under 65 and 9% if you are aged between 85 and 89. These numbers have been temporarily halved because of COVID-19 and its effects on the market – so the minimum requirement will be 2% and 4.5% for the next financial year.
Centrelink treatment of superannuation confuses many people. Basically, your superannuation is not assessed for pension eligibility until you reach pensionable age. It’s quite common for a person of pensionable age to have a younger partner, in which case it may be possible for the older partner to maximise their Centrelink eligibility by having as much superannuation as possible in the name of the younger partner. The exception is when the fund is converted to pension mode – it is then assessed immediately. So, if you have a younger partner it may be better to keep the family superannuation in that person’s name and let them make lump sum withdrawals as necessary once they reach preservation age.
Superannuation can also be a great tool for reducing capital gains tax (CGT). This is because CGT is assessed by adding the gain to your taxable income in the year of sale. A tax-deductible contribution into your super of up to $27,500 may reduce your taxable income to a lower tax-bracket, where the CGT would be much less. There are also carry forward provisions which may be possible to use (conditions apply). Just make sure you take advice in this area. It’s easy to get it wrong.