The 2018 Australian Federal Budget promises to strengthen the economy, create jobs and cut taxes. Treasurer Scott Morrison, who turns 50 this year, again tinkered with – or is it fine-tuned? – superannuation and retirement.
There are some positives this year for retirees looking to boost their income but a lost opportunity with the work test for superannuation contributions.
The work test could have been removed to reduce complexity or at least made more flexible to allow retirees to genuinely boost small balances. As it is, a retiree with $300,000 in superannuation can only boost their superannuation by a maximum $125,000, which is still too low to get them off the age pension.
Below are our initial verdicts on the superannuation and retirement announcements in the 2018-19 Australian Federal Budget.
The Pension work bonus will increase from $250 to $300 per fortnight from 1 July 2019, allowing pensioners to earn more under the Age Pension income test before their pension is reduced.
The Pension Loan Scheme
is essentially a government-run reverse mortgage scheme. From 1 July 2019, eligibility will be extended to all pension-age retirees, not just those who qualify for the Age Pension, and the maximum allowable combined Age Pension and Pension Loan Scheme income stream increases to 150 per cent of the Age Pension rate.
That is, a retiree can borrow against their house to receive a fortnightly income equivalent to one and half times the maximum Age Pension. Combined with the Age Pension, retirees will be able to receive income of up to $35,397 per annum for singles and $53,360 as a couple.
Listen to the podcast:
The winners, the losers and the missed opportunities of the third Turnbull/Morrison Budget.
This becomes an important piece of the retirement income puzzle assisting retirees to unlock equity in their home.
Retirement income streams. Assisting retirees to maximise their income without exhausting it prematurely is one of the big retirement policy challenges. The government is strengthening the framework by introducing a retirement income covenant into the superannuation law to require superfund trustees to offer comprehensive income products for retirement (CIPRs) plus simplified disclosure.
Age Pension means testing of pooled lifetime income streams will also be introduced from 1 July 2019. The treatment of these products is better than what was proposed during consultations last year but is still complex. It’s unclear if it will be enough to encourage the development of new income stream products.
Verdict: Watch this space, pending details in consultation paper.
Contribution work test. After age 65 you can only contribute to superannuation if you have worked at least 40 hours in any 30-day period. You will now be able to contribute for 12 months after retirement without having to satisfy the work test if your total super balance is less than $300,000.
Unfortunately, it is of limited value due to the low threshold and the fact you cannot utilise the three-year bring forward provision for non-concessional contributions after age 65.
Related: Warning over SMSF “red tape” cutting budget measure that could hurt small accounting firms
For someone with less than $300,000 the most you can add to your super is $125,000. Still not enough to get you off the age pension.
Verdict: Could have been better.
Preventing inadvertent concessional cap breaches by certain employees. High-income earners earning over $263,157 per annum who have multiple employers, will be able to nominate that their wages from certain employers are not subject to the superannuation guarantee (SG) from 1 July 2018 to avoid exceeding the concessional contribution cap.
Three measures have been introduced to protect smaller superannuation balances. They are:
- Placing a ban on all exit fees and a cap on account fees to a maximum of 3 per cent of account balances for accounts of less than $6000
- Changing life insurance in superannuation from being a default option to an opt-in option for under 25s, people with balances below $6000 or for accounts that have not received a contribution in the preceding 13 months
- Giving the ATO greater powers to consolidate lost superannuation accounts into active accounts.
However, fee caps can create price distortions and there may be unintended consequences for under 25s in high-risk industries not having life insurance.
Self-managed superannuation funds (SMSFs)
The maximum number of members allowable for an SMSF will increase from four to six. While this is a positive, the majority of funds only have two members. Administrators will have to change systems to cater for the possibility of more members and we expect a shift to corporate trustees. It will also make control more difficult when all trustees are supposed to be responsible.
Verdict: Cautiously positive.
Three yearly compliance audits will be introduced for SMSFs with a history of good record-keeping and compliance. While this will be a welcome relief from red-tape for trustees, annual audits are central to the integrity of the SMSF sector. Annual audits prevent small problems from becoming large problems. It will be interesting to see how this is implemented and whether it results in lower compliance costs.
Verdict: watch this space.
Michael Davison is CPA Australia's policy adviser, retirement & savings
Federal Budget 2018: This year’s winners and losers