Six key changes to superannuation and pension access which kick in on July 1

Welcome to a new financial year. We may not know what is going to happen to our investments in the next 12 months but we do know a raft of tax changes are kicking in that every Australian needs to know about.

The outbreak of inflation we have experienced this year means your personal wealth may appear to have improved this year – but inflation may have cut your spending power substantially.

Consider the new Roy Morgan wealth survey which shows Australia’s personal assets since the GFC in 2007 appear to have doubled, but not when you account for inflation.

The corrosive effect of inflation is most clear in recent times. The average wealth per capita in March 2020 was $484,000; today it is $577,000.

That’s a 19 per cent increase – but adjust for inflation and the lift is nearly halved, dropping to 8 per cent.

In a major effort to offset inflation the government has put through a wide package of inflation indexing changes which all kick off this weekend.

Whether by accident or design the outstanding feature of these changes is that they tilt heavily in favour of older Australians – especially those with large super accounts.

There is also a widening of pension access which will benefit many middle-income retirees.

But if you are still working there is very little to celebrate.

There are six important changes all starting from July 1.

Here they are:

1. Older Australians check it out, your pension access has ­improved

The changes to pension access are perhaps one of the least appreciated developments in the tax system this year.

The upward adjustment of the ‘‘assets test’’ means many more people will qualify for a pension or part pension.

It is up to you to examine if you are in that group.

As Ian Henschke of National Seniors Australia puts it: “Because of adjustments for inflation, the new levels have increased quite significantly. Thousands of Australians who did not qualify for the age pension before, due to their assets or income, will now be eligible and some who were getting a part pension will now get a full pension.”

The are multiple changes. Just to give a flavour of the dollar adjustments, here’s how a couple can have up to $50,000 more than previous settings and still get a full pension.

Under new asset tests, single homeowners can have $301,750 in assets (up $21,750) and single non-homeowners can have $543,000 (up $39,250) before their full pension payment is reduced.

For couples who own a home, the new asset threshold is $451,500 (up $32,500) and for non-homeowner couples it’s $693,500 (up $50,000) before their full pension is affected.

2. If you have a lot in super, you can put in a lot more

For anyone old enough to have enjoyed the salad days when you could sock as much into super as you wanted, there is one last gift waiting for you: inflation adjustments to the tax-free super cap mean that you can have an extra $200,000 in super tax-free. The tax-free cap on super earnings moves up from $1.7m to $1.9m from today – congratulations to the lucky few inflation winners.

3. Pension drawdowns are back to normal

Under the terms of our tax system if you ‘‘draw’’ a pension then you must take out a certain amount every year even if you don’t want it. The drawdown rules start at 4 per cent at 65 and move up to 14 per cent at 95. For the last few years the rules have not been applied fully. Instead a 50 per cent reduction has been in place so that older Australians had only to draw down half of the required rate.

This concession was linked with the pandemic, yet it continued on through the last financial year when the Covid market panic had long since faded. From July 1 the full drawdown rules are back in place.

But there is an escape hatch for many investors who under the rules can – believe it or not – drawdown the money and then re-contribute back into superannuation again. It’s what you might call a super merry-go-round and it is all perfectly legal even if it makes a mockery of the drawdown rules. (You can hear more about re-contribution and the super changes in the latest Money Puzzle Podcast).

4. Working Australians must put more in super, whether they like it or not

From July 1 the Superannuation Guarantee Charge goes from 10.5 per cent to 11 per cent.

For individual investors the key issue here is that if you want to make a pre-tax voluntary contribution to super then the maximum you can contribute is $27,500. But to calculate how much you can voluntarily contribute you must first subtract your enlarged SGC requirement. If you make $200,000 – and if you wanted to contribute the maximum $27,500 – then you would subtract 11 per cent from your salary. That is $22,000, leaving you with the ability to voluntarily contribute $5500 (that is $22,000 and $5500 = $27,500).

5. Also for working Australians – sorry, inflation does not fully apply to you!

Here’s a feature of the tax system which shows how it weighs against younger Australians. Despite inflation running hot and triggering a range of useful changes for older investors, the inflation applied to contribution ‘‘caps’’ is linked with wages rather than the mainstream consumer price index. Wages have been dragging behind the CPI so there is no ‘‘trigger’’ for contribution increases. In other words, the chances of a younger generation ever accumulating the sort of super enjoyed by ‘‘Boomers’’ are greatly ­reduced.

6. The biggest change to super in years is one step closer

The move to make super very unattractive to anyone who has serious licks of money inside the system is set to commence in July 2025, when there is a new tax applying on amounts over $3m – it means there will be an effective 30 per cent tax on super at this level.

But the new tax arrangement is much sharper than it sounds because the new tax – 15 per cent on amounts above $3m coming on top of the existing 15 per cent on amounts over $1.9m – is to be based on unrealised gains.

In other words, there will be tax bills that will need to be paid in cash but they will be based on paper gains.

For property investors this is going to be a real problem – advisers are already shaping plans for wealthy super investors to steer assets outside the super system.