Budget 2016: Whole new ballgame for super investors

The shift in wealth management will be a new line of advice that leads people towards alternative ‘retirement products’.

As the smoke clears after the surprisingly severe cut in superannuation concessions, financial planners are racing to guide clients through the raft of changes to be navigated.

The outstanding shift in wealth management will be a new line of advice that leads investors, savers and top earners away from superannuation and towards alternative “retirement products” that may have tax advantages such as annuities and insurance bonds. Negative gearing in property and shares will also be on the agenda.

For those already “stuck” inside the superannuation system and using superannuation funds for retirement income, wealth managers face difficult conversations as to whether it may make sense to actually remove money from superannuation entirely, especially if superannuation balances are above $1.6 million.

Crucially, sophisticated advisers will be acutely aware of the political process around the changes and the possibility that the more dramatic measures may be amended if vested interests can successfully lobby the government, as they have done successfully in the past on other budget measures.

One of the first items mentioned throughout the wealth advice sector yesterday was a new focus on the tax-free threshold outside super: retirees may look with fresh eyes on the ability to earn $18,200 tax-free under existing Australian Taxation Office tax scales.

Advisers are looking hard at (a) getting individuals to have a two-pronged long-term wealth plan, with income-producing investments held “inside and outside” superannuation;
(b) getting couples to work more closely on super-splitting strategies to optimise residual tax concessions; and (c) making the best of the advantages still left in the system such as the scaled back concessional allowance for super contributions of $25,000 now available up to the age of 75 even if the investor is not working.

Among the specific items every investor and their adviser will need to consider are:

● The lifetime non-concessional cap of $500,000. This is a dramatic windback, considering that until now anyone could put $540,000 into super in any three-year period. Planners will be advising that investors who have not managed to successfully invest in the old system must now urgently plan post-retirement income potential outside super. One clarification here is that the lifetime cap will reportedly be indexed, though that will be a small compensation for serious investors.

● The concessional caps. Again, there has been understandable consternation and confusion as these figures have been moved around endlessly. From now, the dollar limit for all ages is $25,000; and there is no distinction between the under-50s and over-50s as there had been. Planners will be caught short by this move as the allowance had been popular. As Scott Girdlestone of accountants William Buck says: “The reality is that people’s capacity and propensity to make super contributions is greater when they are older.”

● The $1.6 million transfer balance cap on the amount that can be used to fund tax-free retirement phase accounts. This move has high-end wealth advisers aghast as there had always been an understanding the money “inside super” would be left alone. The operational mechanics of this new “cap” will need copious explanations, providing a boon for advisers.

● The reduced attractions of transition-to-retirement plans. The scheme still has some advantages but earnings are now taxed at 15 per cent rather than zero. Little-known products such as annuities and insurance bonds will get more attention as they offer investors a potentially more balanced tax-advantaged portfolio outside superannuation. Annuities have been enjoying a revival as investors find investment markets increasingly challenging. From July next year deferred annuity earnings will be tax exempt, enhancing their attractions even further.

Separately, Greg Bird of Lifeplan Funds Management makes the point that insurance bonds are also a tax-advantaged option: “They do not carry the restriction on withdrawals prior to preservation age, and they do not have contribution limits.”