Making sense of recent and prospective changes to superannuation and the Age Pension

Making sense of recent and prospective changes to superannuation and the Age Pension

It can sometimes be difficult to understand changes to super and the Age Pension, particularly in light of the wide range of reporting by media and commentators.

  1. Now is the time to review your situation if you are on the Age Pension or if you have a relatively large superannuation balance or are making large contributions
    Superannuation tax changes will come into effect on 1 July 2017 and now is the time to review whether you may need to adjust the contributions you are making to superannuation or to move some of your superannuation balance if you are drawing down a superannuation income from an account with a relatively large balance.
  2. Add up your concessional contributions
    These include those made by your employer, ones you’ve salary sacrificed and / or personal tax deductible contributions (if you’re self-employed). There is a relatively brief window to contribute more now if you’re likely to be below your concessional contribution cap for this financial year (generally $30,000, or $35,000 if you’re more than 50 years of age). A tighter and uniform concessional contribution cap of $25,000 will apply in 2017-18 and later years.
  3. Review your long term financial plan
    If you’re a higher income earner, your contributions could be taxed at a higher rate from 1 July 2017. If you have a high account balance, there could be more tax on your investment earnings. The means test for the Age Pension also has been tightened from 1 January 2017. It’s worth reviewing your financial plan to ensure you’re prepared in case any of these changes apply to you.
  4. Check your life insurance cover
    Your level of cover may need to increase as certain tax refunds to super accounts relating to death benefits (anti-detriment payments) may end from 1 July 2017.
  5. Be aware of your non-concessional contributions
    If you’re planning on making any large after-tax contributions going forward, be aware there will be an annual cap of $100,000 from 1 July 2017. You may need to update your financial plan to reflect this change, including making non-concessional contributions before the tighter cap applies.
  6. Consolidate your super
    Having all your super in one account will make it easier to take the steps above and ensure you’re minimising your costs. However, look carefully at any insurance or other benefits you might lose from closing an account.

For more information on the Federal Budget announcements, click here.


Comparison of rules – superannuation tax

Current arrangements

Rules from 1 July 2017

Pre-tax contributions

$30,000 annual cap for under 50s
$35,000 for 50 and over

$25,000 annual cap for everyone
Ability to make catch up contributions from 1 July 2018 using previously unused cap amount on a rolling five-year basis for anyone with less than $500,000 in super

15% tax on contributions for people with income and contributions totalling less than $300,000 a year
30% tax on contributions for people with contributions and income more than $300,000 a year

15% tax on contributions for people with income and contributions totalling less than $250,000 a year
30% tax on contributions for people with income and contributions more than $250,000 a year

Low Income Super Contribution – refund of contributions tax for anyone earning up to $37,000, up to a maximum of $500

Name change – Low Income Super Tax Offset – refund of contributions tax for anyone earning up to $37,000, up to a maximum of $500

After-tax contributions

$180,000 annual after-tax contribution cap

$100,000 annual after-tax contribution cap if your super balance is less than $1.6 million as at 30 June of the previous financial year

The ‘bring forward’ rule permits up to three years’ worth of contributions to be made in one year for anyone aged under 65 years – up to a maximum of $540,000 over three years

The ‘bring forward’ rule permits up to three years’ worth of contributions to be made in one year for anyone aged under 65 years, depending on your total super balance as at 30 June of the previous financial year – up to a maximum of $300,000 over three years

Tax offset for spouse contributions if your spouse earns less than $13,800

Tax offset for spouse contributions if your spouse earns less than $40,000

Tax deduction for personal contributions for anyone earning less than 10% of their income from salary and wages

Tax deduction available for anyone between 18 and 75 years of age who makes a personal contribution* (if you are over 65, you must meet the work test to make a contribution)

Pension phase

No limit on how much can be moved into the pension phase

$1.6 million transfer limit (including in regard to amounts already in pension phase) with special provisions relating to those receiving Defined Benefit pensions

Transition to retirement pensions

Tax free fund earnings – Pension payments tax free from 60 years

Fund earnings taxed at nominal rate of 15% (with the benefit of capital gains tax concessions and dividend imputation).
Pension payments tax free from 60 years

Super death benefits

Anti-detriment payment – an additional amount, representing a refund of contribution tax paid by the deceased over their lifetime, may be paid by the fund on death

Anti-detriment payments abolished unless the member dies before 1 July 2017 and the death benefit is made before 1 July 2019


Changes to Age Pension Assets Test from 1 January 2017

While the asset test is less onerous at relatively low asset levels after 1 January 2017, it leads to a substantial reduction in Age Pension when higher levels of superannuation and other assets are held.

The new assets test free areas are:

  • $250,000 for a single homeowner
  • $375,000 for a homeowner couple
  • $450,000 for a single non-homeowner
  • $575,000 for a non-homeowner couple

The family home is still exempt from the assets test.

Prior to 1 January 2017, for every $1,000 of assets you own over the assets test free area, the pension is reduced by $1.50 per fortnight. This is called the taper rate.

From 1 January 2017, the pension will reduce by $3 per fortnight for every $1,000 of assets over the asset free area.

As a result the following was expected to occur:

  • Approximately 416,000 age pensioners affected
  • A small increase in the percentage of retirees on the full Age Pension in 2023 (compared to what would have been the case if the asset test had not been altered)
  • 170,000 are better off, with 50,000 previously receiving a part Age Pension expected to receive a full Age Pension after the thresholds change. A further 120,000 on a part Age Pension were expected to have their payment to increase by $30 per fortnight
  • An increase in the proportion of retirees who are self-funded, albeit at a lower level of income than would have been the case if no change had happened in regard to the asset test
  • The changes also have resulted in around 91,000 losing their Age Pension entitlement and about 235,000 seeing their part Age Pensions reduce
  • Those who lose their Age Pension have received a Commonwealth Seniors Health Card, which will be exempt indefinitely from the associated income test
  • Losing a Pensioner Concession Card will mean that many of those losing their Age Pension will also no longer qualify for various concessions and reductions in fees and charges offered by a range of State and Territory government departments and agencies. However, some State, Territory and private sector concessions are available to holders of a Commonwealth Seniors Health Card.

The Department of Human Services website has further details of the changes. Click here to find out more

A person affected by the changes should be very careful before spending more and running down assets in order to get the Age Pension or switching to a more risky investment in order to obtain greater investment income to make up for a lower rate of Age Pension.

Running down assets is a very short-term strategy that can compromise long term living standards. Retirees should also be careful they are comfortable with the risk profile of the investments they hold and for the investment option they have chosen with their superannuation fund. While a change to the Age Pension rules may be a reason to review your financial situation, it does not mean that it is sensible to take on undue risk with investments.