Is it time to look beyond superannuation? Here’s why it makes sense to do so.
With the introduction of the $1.6 million transfer balance cap and related restrictions around contributions and the retention of death benefits inside superannuation, the question of whether you should also be looking to build wealth outside of super is becoming more widely-asked.
A higher proportion of balances over $1.6 million are sitting within self-managed superannuation funds (SMSFs), so many are questioning whether it still makes sense to retain their accumulation balance over that cap inside a super fund.
Why would you look at alternatives? Super is a tax-concessional vehicle. In return for “locking up your money”, you are rewarded with valuable tax concessions to provide an incentive to build your retirement savings.
But with reward comes rules, and superannuation is overlaid with a series of rules and regulations prescribing what you can and can’t do. There are quite a few restrictions when it comes to investments, and what needs to be done to ensure that your sole intention is to preserve your super for your retirement.
By removing the excess over $1.6 million from super, you are free to do whatever you want from an investment perspective, which might be very appealing to SMSF members hamstrung by rules on loans or the leasing of assets. For example, super is not able to be used to lend to relatives or co-invest in a relative’s home. With greater financial support being provided to children and grandchildren to enter the property market, monies outside super can be used to provide some financial support.
By removing the non-pension balance, what about the tax concessions that no longer apply with money outside super?
When comparing the two structures, it is important to note that the income attributable to accumulation balances is taxed at 15 per cent from the first dollar. In other words there is no tax-free threshold for super funds in accumulation phase.
Where an SMSF member just has super assets, and is drawing income solely from the $1.6 million pension or is over 60, they will have no personal tax obligations. What this means is that each year they are giving up the tax-free threshold on assets they could potentially own in their personal name. If they withdrew their accumulation balance and invested these monies in their personal name, they can earn taxable income up to $18,200 each year without paying any tax. When factoring in other tax concessions such as franking credits, this can be a sizeable amount. If you also factor in a couple in this situation, then a combined SMSF and sizeable personal pool with a zero per cent tax rate on income is certainly achievable.
Another consideration as to why you may want to move out of your accumulation balance might include the ability to mitigate any future “death tax”. Where your non-tax dependents inherit the taxable component of your super death benefit, they will pay 15 per cent tax on the proceeds. By removing your balance from super, this tax is not applicable.
Super certainly provides a range of valuable tax concessions while you are working and paying tax at marginal tax rates. But in retirement it is certainly worth evaluating whether the accumulation balance in excess of your transfer balance cap is the most effective vehicle. It is certainly not a decision to be taken lightly as it could be problematic getting money back in to super by way of contributions, and related Centrelink benefits could also be affected by this move. It is simply good practice to question whether super will always be the best vehicle for you in retirement.
General Advice Warning
The information provided in this article is general in nature and does not take into account your particular investment objectives, financial situation or insurance needs; we therefore recommend you seek advice tailored to your individual circumstances before making any specific decisions. Ben Smythe is a partner and principal adviser of Minchin Moore Private Wealth.