Most, if not all, investors will have been adversely affected by the share market falls which have translated to negative returns on their super balances. The changes to super rules announced in the Federal Budget in 2009 will also have an impact on investors who were planning to make substantial contributions to super in anticipation of further market recovery. The reduction in the amount that can now be contributed may necessitate a review of existing strategies in order to meet retirement goals.

New concessional contribution caps

Contribution caps for 2009-10
	Age 50 or over	Under age 50
Concessional contributions cap	$50,000	$25,000
Non-concessional contributions cap	$150,000	$150,000

To recap, most employer contributions (including employer superannuation guarantee and salary sacrifice) and personal deductible contributions are counted towards the concessional cap. After tax contributions are considered non-concessional. From 1 July 2009, the concessional contributions cap was halved to $25,000 pa for those aged under 50. The transitional cap, available until 30 June 2012 for individuals aged 50 and over, was halved to $50,000 pa.

It should be noted that the cap in itself isn’t a limit on the amount of concessional contributions an investor can make; rather, it limits the contribution amount that is taxed at the concessional rate of 15%. Concessional contributions above the cap attract an additional 31.5% tax (46.5% in total).

To illustrate this, an investor aged under 50 who makes concessional contributions totalling $50,000 to super this year will pay $7,500 concessional tax (15% of $50,000) plus additional tax of $7,875 (31.5% of $25,000). The bill for the additional tax will be sent to the investor, but they will be allowed to pay the excess contributions tax liability from their super.

For younger individuals, the new limits effectively mean that you will need to consider starting lower salary sacrifice contributions at an earlier age to ensure sufficient balance to fund retirement, as it will no longer be possible to contribute such large amounts in the 10 years prior to retirement. And for individuals approaching retirement, it may be necessary to consider topping up super with non-concessional contributions.

Impact on Transition to Retirement (TTR) strategies

Though there was no specific change announced in relation to Transition to Retirement income streams, the contribution cap change may impact individuals who utilise strategies which combine salary sacrifice and TTR pensions. Those making concessional contributions in excess of the new limits will need to review their strategy to ensure it is rebalanced for the post 1 July 2009 contribution rules.

This may require reducing the amount of their salary sacrifice or personal deductible contributions and reducing the income from the TTR pension or contributing surplus income as personal after-tax contributions after reaching the new concessional cap. If already drawing the minimum income from a TTR, investors may consider rolling some of their pension back into accumulation (keep in mind that the temporary 50% reduction in pension drawdown has been extended for the 2009-10 financial year. Please note that the above may not be appropriate for all investors – if unsure investors should seek professional fee for service financial advice.

Investors also need to look closely at the fees they are paying on their superannuation investments as this is one area where every dollar saved goes into your retirement bottom line. The negative effect of a one per cent per year extra fee on your superannuation fund can result in a reduction in your retirement assets by hundreds of thousands of dollars over a lifetime. Be smart early and you won’t have to play a game of catch up later in life.

Michael Lannon is the Managing Director of 2020 DIRECTINVEST.

The information contained in this article is believed to be accurate. To the maximum extent permitted by the law, 2020 DIRECTINVEST Pty Limited (ACN 069 774 456) (AFSL 244 249) disclaims liability for errors in, or omissions from, this article. In no way should this article be construed as providing securities advice or an endorsement or recommendation of any security or product. In preparing this article we have not taken into consideration your investment objectives or your investment needs and make no representation as to the suitability or otherwise of any product, or security, to you. Before making any investment decision or purchase you should fully satisfy yourself as to the suitability of any security or product you are considering, to your own particular circumstances, and if necessary seek professional fee based investment and tax advice.