Lifting the $500,000 lifetime cap on non-concessional superannuation contributions to closer to $2 million would eliminate “99% of the issues” with the federal government’s proposed super policy, according to one superannuation expert.
Brad Twentyman, a partner in superannuation services at Pitcher Partners, told SmartCompany this morning the $500,000 limit is a “fundamental design problem” of the Coalition’s proposed changes to the superannuation system and changing the level of the cap would assuage many of the “peripheral” concerns about the reform.
The comments come as the Coalition is considering adding a number of exemptions to the non-concessional contribution cap for what is being called “life events”, in response to concerns about the policy from some members of parliament.
Fairfax reports draft legislation for the changes will allow for exemptions to the cap if individuals receive one-off windfalls from an inheritance, divorce settlement or trust payment. The exemptions would not cover transfers of investments into super accounts for the purpose of accessing a lower tax rate.
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Individuals with self-managed super funds (SMSF) who are party to contractual arrangements made prior to the federal budget may also be eligible for exemptions in cases where they need to transfer additional funds into their SMSF in order to purchase property.
The addition of exemptions to the lifetime non-concessional cap could cost the budget up to between $300 and $450 million, according to Fairfax. Treasurer Scott Morrison has previously said any additional costs to the budget bottom line would need to be paid for by other means.
Twentyman says there’s little doubt some members of the community would be concerned about how events such as an receiving an inheritance or trust payment would be treated under the Coalition’s policy, but he believes increasing the lifetime cap on non-concessional contributions would allow for those events to occur while also keeping an “aspirational element” in the Australian superannuation system.
“We’ve been calling for a cap of between $1.5 million and $2 million, at a minimum,” he says.
“All of these issues would go away, not many people would complain and there would still be an incentive for people to save a decent amount of money, enough to easily replace the age pension.”
Twentyman says at a lifetime cap of $500,000 for non-concessional contributions, which is in addition to superannuation guarantee payments, an individual could expect to retire on approximately $50,000 a year.
If the lifetime limit was raised to $2 million, however, he says that individual could instead retire on closer to $100,000 a year, which is “quite a decent income”.
“If you want to put a cap, make sure it’s enough to still encourage people to accrue a responsible capital income sum to provide a reasonable income in retirement,” he says.
Twentyman says he has a number of clients who have already reached the $500,000 level for non-concessional contributions and as such, have been left waiting to see if and when the policy will come into effect. Some of these people have also undertaken transactions that involve their super funds borrowing money to invest in assets and are relying on future contributions to pay down their debt. They are now faced with the prospect of having to sell the asset instead.
“It will have a very big impact,” he says.
“We’ve already passed on 30 June deadline and people had to make decisions in that environment.”