Impeccable timing

superannuation contributions

Changes that allow retirees to contribute to super later in life have come at a good time to offset the recent impact of inflation on fund balances.

Inflationary concerns and rising interest rates are probably the most common talking points when it comes to the economy at the moment and rightly so. The current rate of inflation in Australia is 5.1 per cent, which is the highest it has been in decades.

Of course, these elements in turn usually trigger a dip in both share and property markets, which of course is not good for superannuants and is particularly concerning for retirees.

To this point, research house Chant West has predicted the current economic downturn will see superannuation funds experience a 5 per cent reduction in asset balances this financial year, representing a 13-year low from a performance perspective.

AMP Capital chief economist Shane Oliver estimates this will translate into a loss of $8000 for an individual with a retirement savings balance of $150,000.

At the moment, this will in the main translate into paper losses and will probably not concern younger Australians too much as they will still have the ability to repair their super balance over the coming decades by both an increase in returns and the continual contributions they will be able to make over their remaining employment years.

But it’s a different story for retirees. They are no longer working so don’t have years in the workforce to enable them to make contributions and may not have the time required to fully benefit from a market recovery. In other words, they are taking a retirement savings hit at the most inopportune time where rectification might be impossible. This is known as sequencing risk.

While this predicament is of considerable concern, some of the Morrison government’s budgetary measures that take effect from 1 July could potentially ease the degree of angst retirees might otherwise have to experience.

Probably the most telling change in helping to neutralise sequencing risk is the abolition of the work test rule for individuals up to the age of 75 with regard to making non-concessional contributions. Currently people over 67 cannot make personal superannuation contributions unless they can prove they have been gainfully employed for 40 hours or more in any 30-day period in a particular financial year.

With this requirement no longer necessary, it will be much easier for those over the age of 67 to tip more money into the superannuation system, which remains the most tax-effective savings regime in the country, and potentially repair some of the losses resulting from the current drop in the market.

Further, superannuants can also take advantage of the bring-forward non-concessional contribution rule up to the age of 75. This means, subject to satisfying other conditions, such as having a total super balance of less than $1.7 million, they can make up to three years’ non-concessional contributions in their 74th year. Currently this amounts to $330,000.

In addition, the requisite age that will allow people to make downsizer contributions is to be lowered to 60. This type of contribution has no restrictions involving the total super balance or an upper band age limit and can afford an individual the opportunity to put up to a further $300,000 into their retirement savings.

Ignoring sequencing risk, these types of measures were long overdue as the retirement savings framework will finally allow people to contribute to their super when they can most afford to do so – once the mortgage is paid off and the children’s school fees are no longer an impost.

If we consider sequencing risk, these changes are an added bonus as they have the ability to provide greater peace of mind to retirees.

Given the general misreading of the current inflationary situation, it would be highly doubtful these measures were brought in to combat sequencing risk. But even if this positive result was unintended, no one can deny their introduction couldn’t have come at a better and more critical time.


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