Australians are finally getting a system they can understand.
It's time for a major rethink on superannuation. The plans announced in last week's budget will make super both simpler and more attractive for all taxpayers. Indeed, come July 1 next year, a large proportion of over-60s can forget about paying tax at all - so long as they structure their affairs to take advantage of the reforms.
If the plans are implemented as proposed, the Federal Government will:
* Abolish tax on both super lump sums and pensions from age 60
* Abolish the reasonable benefit limits which restrict how much you can take out of super with tax concessions
* Allow older people to stay in super, whether they are working or not
* Extend the maximum age people can claim deductions on super contributions to 75
* Allow the self-employed a full tax deduction on their super contributions and access to the Government's co-contribution
* Introduce a cap of $50,000 a year for tax-deductible super contributions regardless of age but limit undeducted contributions to $150,000 a year
* Simplify retirement pensions so that only a minimum payment is required each year, with no upper limit on payments
* Relax the age-pension assets test so that retirees are penalised less heavily for having savings over the minimum limit.
Most of the changes will come into effect on July 1 next year, following consultation with the industry on the details. However, the Treasurer, Peter Costello, made it clear the consultation was to work out the fine print; the grand plan would be unchanged.
The plan raises many questions for investors, but here are the answers to some of the main ones.
THE BIG PICTURE
How much better off will I be? It depends on how old you are, how much you have in super, and when you retire. The Government calculates that a 65-year-old retiring when the changes are introduced would save $43,522 on a $400,000 lump sum or $94 a week if he or she took a pension. The tables show the benefits for different ages and levels of income but the percentage increases are higher for bigger savers.
Should I put more money into super? The abolition of all exit taxes will significantly increase super's tax-effectiveness. Andrew Lawless, the technical services manager with MLC, looked at what would happen to a $10,000 investment under the present and new systems.
If you were on the 31.5 per cent tax rate, he says, your $10,000 would grow to $31,139 after 20 years if you salary sacrificed into super. Under the new system, it would grow to $37,293. By comparison, a non-super investment would grow to just $26,082 if we assumed the same level of earnings (3 per cent income with 25 per cent franking and 5 per cent growth).
If you are on the new 41.5 per cent tax rate (from July 1), your super would grow to the same levels under both systems but your non-super investment would grow to just $20,215 after tax - so you'd be almost twice as well off by having the money in super.
