Wage growth set to push important changes in superannuation into place

For most investors and self-managed super funds, it is the contribution changes that matter most.

The latest wage inflation figures, which are twice as strong as the market expected, effectively put important changes in superannuation on track for later this year.

Combined with stronger figures in the recent Consumer Price Index, the two separate inflation indicators are set to trigger indexing that will lift the amount you can put into super each year (contributions cap) and the amount you can use to underpin a tax-free retirement (balance caps).

The changes are set to kick in on July 1, which also happens to be the starting date for the next change in the Superannuation Guarantee Charge: the SGC is due to rise from 9.5 per cent to 10 per cent.

Financial advisers have now assumed the first two changes — higher contribution caps and higher balance caps — will go through as expected.

They also expect the higher SGC will come to pass since it is already legislated and there is only a few months to go before commencement. However, with another federal budget expected in early May, the SGC change may still be postponed or diluted.

For investors, it means preparing to fit the changes into any future plans, especially for salaried workers who wish to optimise the contribution increases.

(Super contribution indexing is based on wage inflation. The latest numbers saw a 0.6 per cent rise in the quarter to December 31, against consensus expectations of 0.3 per cent.)

Advisers warn that the likelihood of errors being made in super contributions this year are heightened since the system has been left largely unchanged for the past three years.

At the big end of town, super funds are putting most of their ­attention towards whether the SGC may be postponed or diluted in some manner. The industry funds group is currently running a campaign to promote the benefits of higher mandatory contributions under the SGC.

But for most investors and self-managed super funds, it is the contribution changes that matter most.

The bulk of contributions are voluntary, not mandatory.

Under the expected July 1 change, the amount you can put into super in pre-tax (concessional) dollars will move up from $25,000 a year to $27,500.

The amount you can put in post-tax (non-concessional) dollars will rise from $100,000 a year to $110,000.

As Tim Miller, education manager at SuperGuardian, suggests: “People are going to have to redo their numbers if we get all these changes at the one time.”

Advisers are warning investors to be particularly alert to the changing landscape in contribution caps, because under current plans the amount you can contribute will go up, but if the SGC goes up as well then you will have to deduct those higher mandatory contributions from the new cap of $27,500 to get the actual amount you will be able to contribute on a voluntary basis.

As Andrew Zbik of CreationWealth says: “Certain segments of the population should be really careful, especially those who try to maximise their super contributions or those who may be very close to retirement.”

The standout opportunity from the new contributions change will be the lift in post-tax contributions, from $100,000 a year to $110,000.

If an investor wishes to use the three-year bring-forward rule under current arrangements, the maximum that can be put in at one time is three times the annual limit, which equals $300,000.

But under the new arrangements it will rise to $330,000, so for investors it may be worth considering waiting until July 1 to do a bring-forward contribution on the basis that an extra $30,000 post-tax can be put in.

There are also opportunities for older people, especially for those about to retire, with the transfer balance cap expected to move from $1.6m to $1.7m.

For some investors who were no longer able to keep making post-tax contributions to super, the indexing may offer a new window to contribute more under the higher balance cap.