Budget Dents Aspirations of those Retiring in Next 10 Years

May 10, 2016

The Federal Government’s 2016 Budget aimed to deliver a crack-down on high income Australians, but has instead dented the aspirations of middle income Australians within 10 years of retirement and looking to accumulate sufficient wealth to live life to the fullest throughout their retirement years.

Australians will need at least $1.5 million in retirement in 10 years to maintain a basic lifestyle of what $72,000 per annum provides today. This amount covers today’s basic cost of living, but should retirees wish to travel and live life beyond the basic, in 10 years time, they will need more than $2.0 million in superannuation.

The Knockout Blow

The Federal Budget this week delivered a knockout blow to these retirement objectives by immediately limiting the amount an individual can contribute into superannuation from their own money.

From the Hawke/Keating era we were encouraged to save for our own retirement by not only having our employer, or own company if self employed, make tax deductible contributions (now called ‘concessional contributions’), but also by investing our own funds (now known as ‘non-concessional contributions’) into superannuation.

The Federal Treasurer stated in August 1991 that “Superannuation is the cornerstone of encouraging greater self-provision … That will help improve retirement living standards and will reduce the budgetary cost of the pension system as the population ages into the next century.”

Up until 30 June 2006 we were able to make unlimited non-concessional contributions. The more the better as the theme continued for us to be self funded and less reliant on the Government’s pension system.

The May 2006 Federal budget introduced limits on non-concessional contributions as pressure mounted on taxing the wealthy. From 1 July 2006 a limit of $1 million was applied for 12 months, before a ‘cap’ of $150,000 per annum was introduced from 1 July 2007. This was increased to $180,000 from 1 July 2014.

Up until yesterday you were able to use the ‘bring-forward provision’ and make three years contributions in the one year, so someone turning 65 in a financial year could make a contribution of $540,000 prior to retirement.

The Federal Budget of 2016 announced a $500,000 lifetime cap on non-concessional contributions. The cap will take into consideration all non-concessional contributions made since 1 July 2007 and will be indexed in $50,000 increments in line with average weekly ordinary time earnings.

Anyone within 10 years of retirement, with a low super balance but a valuable house or a large future inheritance, who is planning to have a comfortable retirement by downsizing their house and/or investing their inheritance through a superannuation structure, will now only be able to deposit a maximum of $500,000 as a non-concessional contribution.

In addition, from 1 July 2017, the concessional contribution cap will reduce to $25,000 per year. Currently the concessional contributions cap is $30,000 per year if under age 50 and $35,000 per year if aged 50 and over.

What this means for the average 50 year old

If you are for example, 50 years of age now, salary sacrificing up to your maximum of $35,000, you will be stopped from putting in $10,000 a year because the new cap is $25,000. Over 10 years with accumulated earnings, that could be $136,000 or more you won’t have in retirement that you would have had under the existing rules. For a couple that could be $272,000 less.

For those retiring in the next 10 years and aiming to live life to the fullest throughout retirement, it will now become important to split your superannuation with your spouse. Remember the goal is to have a minimum $1.5 million at retirement and more than $2.0 million if you want to live life to the fullest.

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Disclaimer: The advice provided on this website is general advice only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs.