Coordinate To Get The Most From Super Changes
The imminent arrival of a limit on super tax-free pension accounts together with lower contribution caps is likely to have the unintended and positive consequence of bringing more couples closer together when it comes to their investment strategies.
It seems inevitable that more spouses, including younger couples, will coordinate their saving efforts so each contributes as much as possible to super and eventually holds as much as possible in tax-free pension accounts. And depending upon their circumstances, more high-balance super members in particular are likely to make their balances as even as possible.
Let's recap on several of the fast-approach key super changes.
From 1 July, an indexed $1.6 million limit will apply to the amount transferrable into a tax-free super pension account. And members with total super balances (in accumulation and pension accounts) of more than $1.6 million will no longer be eligible to make non-concessional contributions from that date.
Further, the concessional (before-tax) and non-concessional (after-tax) contribution caps are reduced from 1 July.
These changes mean is typically even more reason for couples to synchronise their savings – both inside and outside super.
Even younger couples with little expectations at this stage of their lives of saving as much as $1.6 million (in today's dollars) individually in super will typically benefit from each spouse contributing as much as possible each year. And, maybe their lives may take a turn where the possibility of overshooting $1.6 million pension limit (indexed as mentioned) becomes realistic.
The list of financial matters that couples might discuss with themselves (and perhaps with their financial advisers) is lengthy.
Such matters may include: budgeting together; setting shared long-term goals; co-ordinating investment and saving strategies to reach their goals; and setting appropriate asset allocations and diversification for portfolios held jointly and individually.
Other topics to think about discussing as a couple include how to minimise investment costs and whether family members hold enough life, permanent disability, income-protection and health insurance for a family's needs. And one of the less-tangible benefits of taking a joint approach to family finances is that both spouses should gain a better understanding of how family money is managed.
A series of research reports and commentaries by consultants Rice Warner include these points:
- "Wealthy couples could retire with up to $3.2 million in tax-free pension accounts [as at July 2017] by accumulating their superannuation reasonably evenly. Previously, it did not matter how super was divided between a couple – so long as the relationship stayed together."
- Advisers should consider new issues given the $1.6 million limit such as how to optimise the split between super and non-super investments. Based on certain assumptions, it was possible for a super fund member with no other taxable income to hold, say, $400,000 outside super and paying "little or no tax on investment earnings".
- "Couples co-ordinating their plans have improved chances of being able to catch-up contributions tax effectively after a career break to look after young children."
- "If two-thirds of Australians are in a marital relationship at retirement age, it simply makes sense that they would be looking at life post-retirement through the lenses of their combined net wealth (including any eligibility for a couple's age pension)."
Harmonising saving, investing and managing of personal finances will no doubt involve quite a change in mind-set for some couples. Yet it is likely to provide an extremely positive return.
Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment.