Whatever the outcome of the election, one thing's certain. Funding a comfortable retirement is about to become more difficult and in many cases necessitate a change of plans. By limiting the scope for salary sacrifice super and reducing the tax concession on deductible contributions for annual incomes over $250,000, government policy will limit the size of the retirement nest egg super provides.
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Voluntary super sacrifice contributions have provided an easy tax effective way to fast track the building of retirement assets especially when mortgage and family commitments tapered off. But now, with a maximum annual contributions cap of $25,000 set to apply from July 1, 2017, even 20 years contributions at this amount plus smaller contributions built up through compulsory super are unlikely to provide retirement savings much higher than $1 million.
Lifetime annuities available in the commercial market would provide a guaranteed annual indexed income stream of less than $40,000 from this amount. Given that the annual rate of age pension for a married couple provided free of charge by the government for those with no or little assets is around $33,000 annually, struggling to build up a $1 million retirement fund will be hardly be an attractive proposition.
The consequences of diminishing or limiting the tax advantages of super will increase the attractions of investing in other tax shelters including the family home and negative gearing. Whereas previously superannuation offered tax advantages comparable to negative gearing, the financial calculations are about to change dramatically.
The maximum tax advantage for a taxpayer earning more than $250,000 annually from contributing $25,000 to super will soon be less than $5000. The deduction available from negative gearing is unlimited at the relevant maximum marginal tax rate of 47 or 49 per cent depending on the election outcome.
Moreover, while there's now an incentive to reduce tax bills by salary sacrifice super contributions, limiting the deduction available will increase the attraction of further gearing.
For conservative investors reluctant to gear, the principal savings objective will continue to be to pay off the owner-occupied mortgage as quickly as possible. The advantages of doing this are several. If the money is instead invested in personal manner, the income obtained is fully taxable. The interest savings from paying off the mortgage are by contrast totally tax free.
Investing in the family home has the added attraction of complete exemption from the social security assets test. During working life, outright ownership of the family home also provides the collateral for negative gearing transactions including houses rented to other family members.
While all the attention currently is on what the actual super changes will be, now's the time to consider what your best alternative savings strategies will be from July 1, 2017.
Daryl Dixon is the executive chairman of Dixon Advisory. comments@dixon.com.au
