Kew, Australia (PressExposure) July 09, 2009 -- A number of changes to the superannuation system outlined over the past couple of months are about to come into effect from 1 July.
* Halving of the concessional contribution cap * Reduction of the government co-contribution * Extension of the minimum drawdown relief for account based pensions
Halving of the concessional contribution cap
The concessional (or tax deductible) contribution cap is the maximum before tax amount that individuals can contribute to their superannuation. Most people receive their employer's superannuation guarantee contribution as part of their concessional cap but they may also choose to "salary sacrifice" additional amounts up to the cap. Up until 30 June 2009 the cap was $100,000 for over 50 year olds and $50,000 for under 50 year olds however this is reducing to $50,000 and $25,000 respectively (and back to $25,000 for over 50s after 2012).
For many people salary sacrifice is a great way to both save tax within the financial year and also increase their retirement savings. For example, over the past financial year a 58 year old earning $100,000 could choose to salary sacrifice $75,000 of their income into superannuation which would be taxed at 15% within the fund. This contribution alone would result in a tax saving of nearly $12,000. Assuming they were planning to retire at 60, they could then access the money tax free in just 2 years. Combining salary sacrifice with a transition retirement pension has enabled many investors to seriously ramp up their super savings in the final years towards their retirement.
The halving of the concessional contributions means that the same person above would only be able to make total before tax contributions into superannuation of $50,000, assuming $10,000 is already going into superannuation as a superannuation guarantee contribution they would only be able to salary sacrifice $40,000 into their super which would result in an overall tax saving of approximately $8,000.
Despite this reduction the savings are still significant and it will still be a very worthwhile strategy for many people onoing. It's very important to make sure that if you do have salary sacrifice arrangements in place that you are not going to be exceeding the cap in the coming financial year otherwise harsh tax penalties may apply.
Reduction of the government co-contribution
For the next three financial years individuals earning less than $60,342 (indexed) may be eligible for a reduced government co-contribution payment of $1 per $1 of personal (undeducted) contribution up to a maximum of $1,000 (the maximum if payable if total income is less than $30,342 with the actual payment reducing by 5 cents for every $1 of income above this amount). In 2012/13 and 2013/14 this will increase to $1.25 before returning to $1.50 per $1 of personal contribution thereafter.
Although this is a small setback for people that were taking advantage of this concession previously it still represents a great way to increase your retirement savings - 100% return, government guaranteed (plus or minus what the market can contribute!).
Extension of minimum drawdown relief
The minimum drawdown relief for account based pensions introduced part way through this financial year has been extended for the whole of 2009/10. This measure was introduced as investors with account based pensions that were exposed to market-linked investments were effectively being forced to realise losses at a point where asset values may prove to have been at seriously depressed levels. The relief means that individuals are able to drawdown half of the otherwise prescribed minimum levels. For example, a 76 year old is normally required to drawdown a minimum of 6% of the value of their pension (if their pension is worth $200,000 they must drawdown at least $12,000 within the financial year). They would now permitted to draw a minimum of 3% (or $6,000) in the coming financial year. This potentially reduces the negative impact of having to sell assets in a depressed markets in order to make the pension payments.
This concession should help pension holders to lessen the impact of the current market conditions on the medium to long term value of their holdings. As always there is no maximum drawdown amount on an allocated pension other than transition to retirement pensions for which the maximum drawdown amount is 10% of the value of the account.
For more information on superannuation or for superannution advice, visit [http://www.superworks.com.au]