Budget 2016: How to Adjust Your Super Strategy
If, like me, you assumed Federal Treasurer Scott Morrison was going to go easy on well-established superannuation savers in the Budget, you likely share my slightly queasy feeling. It turns out we’re more alone that we first thought and that a changing landscape may call for a change in strategy.
Certainly, the proposed measures to help low income earners are welcome because they removed the distortion under which lower paid Australians were paying more tax on their super contributions than they were on their income.
The Low Income Tax Offset will help around 3.5 million people, given that the Low Income Super Contribution (LISC) that it replaces was due to expire mid next year.
But the measure to bring down the cap on tax free concessional contributions for the over 50s from $35,000 a year to $25,000 a year looks like particularly bad policy. That’s because any move to crimp savers’ desire to be self-sufficient in retirement is likely to backfire down the track by leaving them with less savings than they originally planned to sock away. That means more people will be reliant on the Government pension, which is exactly what Treasury does not want.
There’s a lot of unhappiness about limiting tax free super to $1.6 million per individual after July 1 next year. Treasurer Scott Morrison is insisting that’s not retrospective but it does force people who have spent years building their super, to dismantle their plans or start paying tax on the earnings from the balance of their account.
And one of the more egregious tricks in the selling of the Budget is the declaration that such measures will only affect a small number of people. Aside from the fact that such a statement has nothing to do with the fairness (or unfairness) of a measure, it’s not actually true.
The research centre at ASFA, the Association of Superannuation Funds of Australia, calculates that about 9 per cent of superfund members will be affected by one or more negative changes to super taxation. That’s about twice as much as we’re being led to believe, and what’s more, only about 10 per cent of savers are actively looking out for their super. In simple terms: the people doing the most work have been hit the hardest.
And they’re not all rich. ASFA again notes that around 36,000 women with super balances of less than $200,000 in 2013/14, were making annual pre-tax contributions in excess of $25,000.
So, what to do? The fact that the $25,000 cap doesn’t come into force until July 1 2017 means we have another full year before this kicks in, during which time there is a chance the measure will be reconsidered.
Meanwhile, engaged super savers should assume they’re not going to get much help from anyone but themselves. That means monitoring their accounts and, in the case of SMSF trustees, moving away from the ‘set and forget’ attitude that had, perhaps, crept in.
That means looking for investment opportunities, and most particularly, for capital growth opportunities in the accumulation phase and dialling up risk slightly. This should include diversifying amongst equity classes such as growth stocks, high yield stocks and new issues.
The latter may sound like a late inclusion but recent data released by OnMarket confirmed that a steady policy of investing in new issues has been one of the most successful investment strategies of all, returning an average of 23 per cent in 2015 (while the ASX200 went down 9 per cent in the same period, no less).
So in summary while yes, there are a lot of negatives out there, a relentless focus on building up the balance pre-retirement is still, overall, the best course to follow.
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Andrew Main is writing for OnMarket, an Australian fin tech that recently launched the world's first direct access portal into ASX IPOs and placements. Andrew is an award winning journalist and the former Wealth Editor of The Australian with long experience reporting on equity markets and all things financial.