In May 2016 the Coalition’s federal budget was announced. The proposed changes, which are contingent on the Coalition government being re-elected and the legislation being passed, include a $1.6 million limit on pension phase balances and new concessional contribution rules. In all, there are a few changes that could significantly impact pensions, retirees, and older Australians. Here, we sum up the key changes and provide a brief outline of the new age pension rules, which are changes that are already locked in to take effect from the start of 2017.
Changes that could impact pensioners and retirees
The key changes that could have broad implications for, pensioners and older Australians include a proposed $1.6 million limit on pension phase balances, access to concessional contributions, and looser contribution conditions.
$1.6 million limit on pension phase balances
The federal government is proposing to limit how much people can keep in their low-tax superannuation funds with a $1.6 million cap on retirement balances, which is far stricter than the $2.5 million cap that the Association of Superannuation Funds of Australia lobbied for. If this provision is passed, it would limit the total amount of superannuation that any one individual can transfer into and/or hold in their retirement phase accounts.
Under this provision, if current retirees have more than $1.6 million in pension phase, they will need to withdraw the excess amount or revert it to accumulation phase, which would mean the extra money would be subject to 15% tax.
Although the $1.6 million limit is expected to impact less than 1% of super fund members, it will apply to both current retirees and to individuals who will enter their retirement phase in the future. The provision will not impact how much you can save outside these accounts or outside your superannuation.
Loosening of contribution conditions
The proposed changes include provisions to support older Australians to make more personal super contributions by allowing everyone – regardless of their employment situation – to claim tax deductions for their personal contributions. Currently, the work tests means that those between the age of 65 and 74 need to work 40 hours or more in 30 consecutive days in a financial year to satisfy the work test to make contributions.
If the changes take effect, anyone can make concessional super contributions, subject of course to the concessional contribution cap. This change is likely to benefit those who are partially self-employed and partially salary earners, as well as those whose employers don’t offer salary sacrifice arrangements, including retirees who fall into these categories. It will also benefit those retirees or pensioners aged between 65 and 74 who are currently constrained by minimum work requirements in their voluntary super contributions.
Similarly, with the new catch-up concessional super contributions that allow unused caps to be rolled over for up to five years, retirees with intermittent work patterns or lower contributions could more easily boost their super balances. All these changes will give retirees more flexibility and choice in their super contributions.
Expansion of the low-income spouse tax offset
If the proposed changes are passed, retirees and pensioners might be able to take advantage of the expanded spouse tax offset. The current 18% tax offset of up to $540 will be made available to those contributing to a recipient spouse (under the age of 75) who has an income of up to $37,000, as opposed to the current $10,800. The offset gradually reduces for income above the $37,000 threshold to be zero at above $40,000.
Increase variety of retirement income products
The budget also proposes to extend, from 1 July 2017, the tax exemption on earnings in the retirement phase for more products, including deferred lifetime annuities and group self- annuitisation products. This could lead to more choice for retirees and their superannuation funds, especially retirees and pensions who believe they might outlive their super fund savings.
Changes to the age pension rules
Older Australians, and pensioners will be impacted significantly by the stricter age pension assets test that is due to take effect from the beginning of 2017. The changes to the age pension rules, which were announced in the 2015 budget and are quite separate from the federal budget announced in 2016, will impact hundreds of thousands of retirees. Among the many changes are the following (thresholds are different for non-homeowners):
- Couples – If you’re homeowner and currently receive the age pension and you own more than $823,000 in assets (including super but excluding the home) as a couple, you will no longer be eligible to receive the pension from 1 January 2017. If you own less than that but more than $450,000 your entitlements will be lower.
- Singles – If you are a single pensioner homeowner who currently receives the pension and own more than $547,000 in assets, you will also lose your pension entitlements. Single pensioners who own less than that but have more than $290,000 in assets will also be affected by reduced entitlements.