It has always been an attractive and sensible strategy to accumulate superannuation in both partners' names. Now, following the budget changes and enunciation of Labor's election platform, it's a much more important retirement planning issue. Both major parties' policies will provide a huge boost to couples, especially those with larger amounts where account balances are equally split.
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Whether the limit on the tax-free annual pension amount is the earnings on $1.6 million (Coalition) or $75,000 (Labor), retired couples will benefit from having two separate accounts with approximately equal amounts. Even if the total combined amount is less than the $1.6 million proposed budget limit for individuals, splitting the combined amount provides future protection, for example, if an inheritance is received or the maximum limit is reduced.
Balance splitting is even more important if the tax-free limit is set at $75,000. In the past, though not necessarily in the future, annual double digit investment returns were common. With a 10 per cent return, $1.6 million in an account would generate a taxable income above $75,000 of $85,000 and an annual tax bill of $12,350.
Effectively, what the $75,000 annual tax-free pension limit does is allow couples with account balances equally split to obtain a combined $150,000 annual tax-free retirement income. Splitting the balances also reduces the uncertainty about fluctuating returns helping to reduce tax in periods of high return.
Unfortunately, for a variety of reasons including different annual incomes and less generous employer super arrangements many couples find themselves with one partner having the lion's share of their super. Worse still, other than in divorces where super can be split evenly between partners, prudent planning or good luck such as receiving an inheritance is required to equalise account balances.
For intact relationships, the options currently available to equalise balances are limited and will be further constrained if the budget proposal to limit lifetime concessional contributions to $500,000 is enacted. For people receiving employer super contributions, the spouse splitting arrangements permit up to 85 per cent of the previous year's concessional contributions to be transferred to a spouse account.
There is still time to transfer a maximum of $35,000 of last tax year's concessional contribution to an eligible spouse account before June 30. It would take many years of using this option to equalise account balances.
The other option of withdrawing part of an account balance on retirement and re-contributing this to a spouse account offers greater scope. It will, however, be restricted if the new proposed lifetime cap on non-concessional contributions is introduced.
Given that separating partners are allowed to split their account balances equally, extending this option to intact couples makes eminent sense. The changes proposed by both major parties would then be fairer.
Daryl Dixon is the executive chairman of Dixon Advisory. comments@dixon.com.au.
