Tuesday 10 May 2016 by FIIG Securities retirementcar Opinion

Pension accounts should be vehicles for low risk assets

No matter who wins the next election, there will be changes to superannuation rules

The new proposed $1.6 million pension cap will be an issue for many of you who have built up substantial retirement savings after years of sacrificing into your superannuation accounts.

It seems that the $1.6 million cap per person is a one off opportunity to set assets aside in pension mode where earnings will be tax free. While amounts can progressively be transferred into the account, once it reaches the limit, no further funds can be transferred even if there is another GFC type event.

The pension account should therefore contain the lowest risk and least volatile investments such as deposits and bonds. Any permanent loss on your shares in pension mode means a permanent loss on the tax free status. 

Investors can still have an accumulation account where funds in excess of the $1.6 million limit can be kept. Earnings on this account will be taxed at 15%. It’ll be up to you to determine whether it’s worth leaving the funds in the account or taking them out.

Potentially investors with close to, or over $1.6 million will have two accounts.

Two key issues that have yet to be resolved include:

  1. How and when the value of the superannuation fund is calculated. Obviously values go up and down and this could be an important determinant.
  2. If investors can determine which assets to put into which account.

The $1.6 million will be indexed but will only go up in $100,000 increments. In this low rate environment, I would expect it will take some time for the level to increase.

One of the opportunities is to rebalance superannuation holdings between couples. If one member breeches the $1.6 million cap and the other falls short, potentially the investor that exceeds the cap could withdraw $500,000 and re-contribute to their spouse’s fund.

There will be plenty of ways to use funds if you decide to withdraw them from your superannuation account but encouraging young people in your family to invest in super and matching their contributions could be a way to help them build for the future.

There are plenty of “ifs and buts”, not least the Liberal party being returned to power. Some current polls show a tight race, potentially leaving room for negotiation to get the new rules passed. There have been some suggestions to stick to your current strategy and hope that some proposals are watered down. For example the proposed $500,000 maximum non concessional amount that is retrospective from 1 July 2007 – where the date could change or the amount increase.

Bill Shorten stated in his budget reply speech that the party has “very grave concerns about retrospective changes”. If they decide to somewhat embrace the $1.6 million cap, it seems they may alter the date, perhaps offering a window of opportunity for those in a position to make additional payment in the coming months.

One final thought.

There is no certainty in life but SMSF expert, Graeme Colley, previously from the SMSF Association said to me last year, “make full use of superannuation concessions while they are available to you” – how true.