Home' SA 50s Lifestyle : SA 50s Summer 09 10 Contents 26 Summer 2009
Is super still super? By Steve Capuano, Certified Financial Planner,
Godfrey Pembroke Financial Consultants
Investors have been for a tough ride
lately. With economies around the
world still reeling from the effects
of the Global Financial Crisis, super
funds again delivered negative
returns last financial year.
On top of that, with the Government
recently halving the amount of
concessional super contributions
you can make, or receive, each
year, you may be wondering if it still
makes sense as a retirement saving
The good news is that even with the
recent volatility and Government
changes, super is still a great place
to invest for retirement. However, as
highlighted below, there are some
things you'll need to be mindful of to
keep within the rules.
What has changed?
On July 1 this year, the Government
reduced the cap on concessional
super contributions from:
• $50,000 to $25,0001pa (for
people under age 50), and
• $100,000 to $50,0002 pa (for
people aged 50 or over until 30
June 2012) and $25,0001pa
These caps limit the amount of
Superannuation Guarantee, salary
sacrifice3, personal deductible4
and certain other types of super
contributions that can be made, or
received, in each financial year.
What does this change mean?
It's important to be aware of this
change because if you exceed your
cap any excess contributions will be
taxed at a penalty rate of 31.5%.
But this doesn't mean everyone will
be adversely impacted.
For example, if you're currently
aged 50 or over, earn a salary of
$100,000 pa and your employer is
making Superannuation Guarantee
contributions of 9% (or $9,000)
pa, you could still make additional
concessional contributions of up to
$41,000 in each of the next three
financial years without exceeding
Then, from July 1, 2012, when
a cap of $25,0001pa will apply,
you could still make additional
concessional contributions of up to
$16,000 pa without any adverse tax
Where you could be affected is if you:
• Contributed up to the higher limits
that applied in 2008/09 and
haven't adjusted your strategy,
• Are not aware of all the different
amounts that are counted towards
the concessional contribution cap.
You may want to speak to your
financial adviser to see if you need
to alter the amount you contribute
this financial year and beyond.
Easing into retirement
It's particularly important to
review your concessional super
contributions if you've been using
the popular "transition to retirement"
strategy. This is where you're over
age 55 and seeking to build a bigger
retirement nest egg without reducing
your current income.
It involves contributing some of your
pre-tax salary into super, putting
some of your existing super in a
transition to retirement pension
(TRP), and drawing a regular income
from the pension5 to replace your
But even though the halving of the
concessional contribution cap is
likely to reduce the benefits from this
strategy, our analysis suggests it can
still be worthwhile as the following
case study shows.
1This cap is indexed periodically in increments of $5,000 (rounded down). 2 This cap is not indexed. 3These are super contributions that are made with pre-tax salary. 4To make personal deductible
contributions you will need to earn less than 10% of your income from eligible employment (eg you are self-employed) and meet certain other conditions. 5A TRP is a type of investment that enables you to
receive a tax-effective income. It can only be commenced with superannuation money and you currently must be aged 55 or over. 6 In 2009/10, the non-concessional contribution cap is $150,000. However, if
you're under age 65, it's possible to contribute up to $450,000 in 2009/10, provided your total non-concessional contributions in this financial year, and the following two financial years, don't exceed $450,000.
Jack is 55 years of age and earns a pre-tax salary of $90,000pa. On top of this, his employer pays 9%
Superannuation Guarantee contributions (or $8,100pa). Jack wants to retire in 10 years and invests $300,000 of
his existing super balance in a TRP on July 1, 2009.
He salary sacrifices $30,000pa into his super fund in each of the next three financial years and the maximum
amount allowable under the concessional contribution cap thereafter. He also draws enough income each year
from his TRP so he can continue to receive an after-tax income of $67,000pa.
Below we show the results and value added by this strategy after 1, 5 and 10 years. For example, this strategy
could add an extra $65,235 to Jack's retirement savings at the end of year 10, which would clearly make it
Value of investments (after cap reduction)
After year: Before strategy (super only) After strategy (super & TRP) Value added by strategy
Assumptions: Jack's super consists entirely of the taxable component. He continues to receive 9%
Superannuation Guarantee contributions based on his package of $90,000 pa, even when he salary sacrifices
into super. Both the super and TRP investment earn a total pre-tax return of 8%pa (split 3.5% income and 4.5%
growth). Investment income is franked at 30%. Jack receives a tax-free income from the TRP from age 60. Salary
doesn't change over the 10-year period. Neither the super nor TRP investment are cashed out.
are pre-tax super contributions,
and include employer
contributions (Super Guarantee),
salary sacrifice and self-
contributions are after-tax
super contributions, and include
personal contributions, spouse
contributions and Government
Keeping your options open
If you aren't yet eligible (or don't
plan) to commence a TRP, you could
• Make concessional contributions
up to the reduced cap, and
• Invest additional money in super
as a personal after-tax contribution.
This will, however, count towards
the cap on non-concessional
contributions 6 .
While non-concessional contributions
are generally not as tax-effective as
concessional contributions, taking
advantage of this additional cap
could still be better than saving for
retirement outside super.
Bring forward your concessional
Because it will no longer be possible
to make larger concessional
contributions in the years
immediately prior to retirement,
you may need to contribute smaller
amounts earlier (provided you stay
within your cap).
To do this, you may need to review
your current income and expenses
to see whether you have any spare
cash flow that could be invested in
Convert your home loan to
One way to free up additional cash
flow to invest in super is to convert
your home loan from principal and
interest to interest only. While this
strategy won't suit everyone, it could
enable you to increase your super
balance and still pay off your home
loan by the time you retire.
*continued next page
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