Super: Seven things you need to know about the new system

Big changes are about to hit the superannuation sector. Here are seven things you need to know before they kick in.

Faster than you can say the words “non-concessional contributions”, the sweeping super changes that have been looming over investors for months are ready to launch.

The new system kicks off on July 1 but the misunderstanding around the new rules is still widespread.

Nonetheless, investors simply must grapple with the new superannuation regime and at least understand the key elements that are due to change.

Here are the seven most common misunderstandings and the realities around those issues.

1. The new pre-tax contribution “cap” is not really $25,000 because it includes your super guarantee contributions.

Under the present mandatory superannuation system, your employer must put 9.5 per cent of your annual salary package into superannuation for you. If you wish to make a voluntary super­annuation contribution, that amount is included in the $25,000 pre-tax (concessional) cap.

It seems many readers of The Australian — and we can safely ­assume the wider public — do not realise this is how it works: it means the actual pre-tax cap has just got a lot smaller than might first be evident.

If you make $100,000 then your employer’s compulsory contribution is $9500 — in turn that means the amount you can voluntarily put into super on a pre-tax basis through so-called salary sacrifice is $25,000 minus $9500, or $15,500.

2. You can still put a multi-year sum into super — but not as much as you could before.

Inside our super system there is a procedure open to all, called the “three-year bring forward rule”, which applies to post-tax (non-concessional) contributions. It is still in place, only it’s just been sharply reduced.

Until now you could put in $180,000 each year and under the “three-year bring forward” rule you could put in $180,000 x 3 — that is $540,000.

From July 1 the post-tax annual limit is $100,000. The three-year bring forward rule is still in place so you can put in $100,000 x 3, that is $300,000.

3. The new super balance caps pertain to individuals — it’s a $1.6 million limit per head.

Many people operate their super as a couple. Naturally, enough many of the investors in DIY funds have interpreted the new rules as meaning the $1.6m cap is per fund — it’s not, it’s per person (or member) so with a ­couple the effective cap is $1.6m x 2 — that is $3.2m.

4. You can have more than $1.6m in super, you just can’t have more than that funding a tax-free pension.

This is very often misunderstood by investors — it’s not a case of $1.6m is the most you can have in super from now on.

The most you can have funding a tax-free pension income is $1.6m — if you have more than that you can keep it in super, that is it can remain within the super system.

But the earnings on the money that is above $1.6m still in the super system will be taxed at the standard rate of tax for super (in accumulation) of 15 per cent.

5. There is a tax-free income alternative for retirees outside the super system.

Our personal tax system is not based on age — it is based on income and under the current system the first $18,200 that anyone makes is tax free.

So it is quite possible that people will take money out of the super system entirely and seek tax-free earnings rather than earnings which will be taxed at 15 per cent (see item 4 for more on this).

On top of this many seniors are entitled to various tax offsets that can bring their tax-free earnings threshold well above $18,000.

6. There are two caps and they are both $1.6m.

Yes, the boffins in Treasury thought it was not confusing enough with the multiplicity of rules in super so they introduced two new caps and they are the same dollar value, just to make sure everyone gets mixed up.

There is the $1.6m transfer ­balance cap — put simply, this is the maximum amount with which you can kick off your tax-free pension fund at the time you retire.

And there is the $1.6m total superannuation balance cap — this exists chiefly to police the issue of whether you can (at any age) put more into super.

How it works is, they add just about everything in here from ­retirement pension account and accumulation accounts and if that number is over $1.6m, then you cannot make any further post-tax contributions to super.

But you can make pre- tax contributions! Who knows why?

As you may have gathered by now, if you are looking for logic here, you are looking in the wrong place.

7. If you don’t have $1.6m by the time of retirement, all is not lost … you can add to it later.

If you did not make to the $1.6m ceiling and somehow came upon more money later, then all is not lost: you can add to the fund to bring it up to the maximum limit subject to you satisfying contribution rules.