Budget changes support a brighter retirement

With tax cuts grabbing most of the attention in the May 2018 Budget, some quiet tweaks to superannuation and retirement income were drowned out in all the noise. But these small changes could have a big effect on the amount of money that ends up in your nest egg when you retire. 

Here’s a rundown of some of the more significant proposed changes:

Income opportunities for retirees.i

The expansion of the Pension Loan Scheme will allow all Australians of Age Pension age to boost their income using the equity in their home. Under the scheme, retirees will be able to borrow up to 150 per cent of the Age Pension (currently 100 per cent), or $11,799 a year for singles and $17,787 for couples who are on the full Age Pension.

The loan is a reverse mortgage with an interest rate set at 5.25 per cent a year, about 1 per cent below the average commercial rate.ii The loan is typically not repaid until the home is sold and the Government guarantees that the debt can never exceed the value of the home. Currently, only part-pensioners can access the scheme. 

In addition, all age pensioners will be able to earn up to $300 a fortnight in employment income, or $7,800 a year, without reducing their pension. This is an increase of $50 a fortnight and, for the first time, self-employed pensioners will also be eligible. 

Recent retirees aged 65-74 with an account balance below $300,000 will be given an extra year to make voluntary super contributions without having to meet the work test.

Super help for young members

Younger Australians at the start of their working life could also receive a boost to their retirement savings – of more than $500 a year in some cases.iii From July 2019, insurance premiums won’t be taken out of your super (unless you request it) if you are under 25, your account balance is less than $6,000, or you don’t make contributions for 13 months and the account is inactive. 

While life insurance is not a priority and can eat away at small balances for many young, single people, the change will mean younger fund members with dependents will need to take extra steps to ensure they have adequate cover. 

Younger members will also benefit from a 3 per cent annual cap on passive fees for account balances below $6,000 while exit fees will be banned on all super accounts.

Finding lost super

The Government also hopes to reunite more people with their lost super by requiring super funds to transfer inactive accounts (where contributions have not been received for 13 months) with a balance below $6,000 to the Australian Taxation Office (ATO). The ATO will automatically reunite inactive accounts with active accounts where the combined balance will be at least $6,000. 

At the other end of the scale, people who earn more than $263,157 from multiple employers will be able to exclude wages from certain employers from the Superannuation Guarantee (SG) from 1 July 2018. This will help employees avoid unintentionally breaching the $25,000 a year concessional contributions cap. Employees may then be able to negotiate with their employer to receive additional income taxed at marginal tax rates.

Easing restrictions on SMSFs

Self-managed super funds (SMSFs) will be able to add more members, with the limit increased from four to six members. This will give larger families the flexibility to include more than two adult children. 

Well-run SMSFs will also be rewarded with a reduction in their administrative burden and compliance costs. Funds with three consecutive clear audits and annual returns lodged on time will be able to switch from annual to three-yearly audits from July 2019.

All these Budget measures are simply proposals for now and will need to be passed by both houses of Parliament. If passed, they should provide opportunities for many Australians to save more during their working lives to boost their income in retirement.

i https://www.budget.gov.au/2018-19/content/factsheets/3-financially-prepared.html#pwb 

ii https://www.canstar.com.au/home-loans/reverse-mortgages/things-consider-reverse-mortgages (3 August 2017) 

iii https://www.canstar.com.au/superannuation/budget-2018-super-changes-save-young-people-500-per-year/ (9 May 18)

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Time to review transition to retirement pensions

Amid the major reforms to superannuation that took effect on July 1, some significant changes to the tax treatment of your Transition to Retirement Pension (TRIP) may have flown under the radar. Some individuals will be affected more than others, so if you have a TRIP or are thinking about starting one, now is the time to review your strategy.

The Government’s super reforms were designed to improve the sustainability, flexibility and integrity of the system. According to the Tax Office, the changes to TRIPs were designed to ensure that they’re not used primarily for tax purposes.i
 

What is a TRIP?

A TRIP allows you to access up to 10 per cent of your super in the lead-up to retirement. The idea is that you can supplement your employment income while you continue to work full or part-time. The tax benefit comes from replacing employment income taxed at your marginal rate with concessionally-taxed income from super.

When combined with salary sacrifice, a TRIP strategy also allows you to boost your super without sacrificing some or any of your after-tax income.

As you would expect with super, there are strict rules around eligibility. For starters, you must have reached preservation age; this is currently 56, rising progressively to age 60 for everyone born after June 1964. Then there are maximum (10 per cent) and minimum (4 per cent) amounts you can withdraw from your TRIP account balance each financial year. And you can’t withdraw your money in a lump sum, it must be received as an income stream unless you retire, turn 65 or satisfy another condition of release.
 

What are the changes?

The main change relates to the taxation of earnings on investments used to fund your TRIP. From July 1, earnings on these investments are no longer tax free. Instead they are now taxed at the 15 per cent rate that applies to earnings from assets held in the accumulation phase of super.

The good news is that payments you receive from your TRIP will continue to be taxed as they were previously. That is, payments are tax free if you are aged over 60, or taxed at your marginal rate with a 15 per cent tax offset if you are aged between 56 and 60.

Another of the super reforms will limit the appeal of TRIPS for high income earners. That’s because the income threshold at which individuals begin to pay contributions tax at the higher rate of 30 per cent, instead of normal super rate of 15 per cent, has been lowered from $300,000 to $250,000.

New limits on concessional (before tax) super contributions may also limit the potential benefit of the popular salary sacrifice strategy when combined with a TRIP. From 1 July, the maximum concessional contribution (including Super Guarantee payments and salary sacrifice arrangements) is $25,000 a year for everyone. Previously anyone over 49 could contribute up to $35,000 a year this way.
 

What should I do?

While TRIPS are still a tax effective way to manage your finances in the leadup to retirement, the new rules mean some people could be better off pursuing other strategies. In some cases, high income earners who already have a TRIP and satisfy a condition of release, such as retiring or changing jobs after turning 60, may be better switching it off or converting to a normal account-based pension.

At the very least, if you have a TRIP or are thinking of starting one and you haven’t already done so, you should review whether it’s still be the best option for you going forward. The new super rules are complex and their impact will depend on your overall financial situation so it’s important to seek professional advice before you act. If you think you may be affected or you would simply like to discuss your options in the leadup to retirement, don’t hesitate to give us a call.
 

i https://www.ato.gov.au/individuals/super/super-changes/change-to-transition-to-retirement-income-streams/

Aged care changes and the family home

Decisions around aged care are always difficult and emotional. From the start of next year they are likely to get even more complex, with both the Age Pension and aged care sectors set for another shake-up.

Currently, many people entering aged care choose to keep their former home and rent it out to help supplement their accommodation payments. From a financial planning perspective this strategy is attractive, as your former home and any rental income are exempt from assessment for the Age Pension. But from 1 January 2017 this will all change.
 

Changes to aged care fees

In recent years, the government has begun tightening the rules around the calculation of means-tested fees for residential aged care.

From 1 July 2014, both your assets and income were considered when calculating your aged care fee. However, if you retained your former home and chose to rent it out, the rental income was not counted towards your assessed income if you paid for some of your aged care costs using periodic payments, such as the rental-type ‘daily accommodation payment’.

On 1 January 2016 this rule changed, so when you entered aged care any rental income you received from your former home was included in your assessed income in the same way as any other type of income, such as interest or share dividends. Paying for your aged care costs using a periodic payment no longer had an advantage compared to paying via a lump sum.

These changes have seen many new residents of aged care facilities facing higher fees, as the assessable income used to calculate their fee is higher than under the pre-2016 rules.

Although these changes have affected aged care fees for new residents, they had no impact on the treatment of a former home when working out eligibility for the Age Pension. However, that's now set to change.
 

Former home to be assessable for Age Pension

Currently, your former home is excluded from the Age Pension asset test for two years if you enter aged care. An indefinite exemption is available if your home is rented and you pay your accommodation costs with a periodic payment. In this situation, neither your former home nor the rental income are counted under the Age Pension asset or income tests.

This will change from 1 January 2017, when new amendments to legislation will harmonise the means-tested treatment of a former home for both aged care and the Age Pension.

According to the Treasurer, Scott Morrison, the changes will “align the pension means-testing arrangements with residential aged care arrangements. This measure removes poorly targeted exemptions that are associated with the pensioner’s former home, and are only available to pensioners who pay their aged care accommodation costs in periodic payments.”i

What this means for new entrants into aged care facilities is that the net rental income earned on your former home (where you decide to pay your accommodation costs with a daily payment rather than a lump sum), will now be counted towards the Age Pension income test.

Means-testing for aged care residents who rent their former home and fund their accommodation costs by periodic payments

Date resident entered aged careAge Pension Income TestAge Pension Assets TestAge care fees means testing

Rental income from former homeValue of former homeRental income from former home

Prior to 31 December 2015ExemptExemptExempt

After 1 January 2016ExemptExemptAssessed

After 1 January 2017*Assessed*Assessed*Assessed

* Changes contained in the Budget Saving (Omnibus) Bill 2016 passed in September.
 

Buy or sell your home?

With the new laws the decision about whether to keep your former home and rent it out will become more complicated for people entering residential aged care.

Under the old rules there were benefits in keeping your home, enjoying a boost to your income from any rental payments and making periodic payments. Now the decision will not be as straightforward.

Retaining your former home may still be worthwhile, but new aged care residents will need to carefully work out whether the benefit from their rental income outweighs the potential loss of some of their Age Pension.
 

Tougher asset test rules

Just to complicate matters, the new rules are planned to come into force at the same time as separate changes affecting the assets test thresholds used to calculate pension entitlements. Although limits for the Age Pension asset test are increasing from 1 January 2017, the rate at which pensions are reduced once you exceed the threshold is also increasing. This will see some pensioners have their pension payments reduced or cancelled altogether.

Both changes are likely to have an adverse impact on the Age Pension entitlement of some people entering aged care who wish to retain their former home. So before you make any binding decisions be sure to carefully weigh up all your options.

Aged care is a very complex area, so it’s important to seek professional advice before making any decisions in this area. If you would like to discuss your aged care funding options, please call our office.

i http://sjm.ministers.treasury.gov.au/speech/016-2016/