“Mr Speaker, this cannot be just another budget, because these are extraordinary times.”
Thus the Federal Treasurer, Scott Morrison, introduced the 2016/17 Federal Budget. And indeed he was not exaggerating, with the Budget coming a mere few hours after the Reserve Bank made the decision to drop Australia’s official cash rate to a historically low 1.75%.
Retirement incomes were a main focus of the Budget, and a summary of the proposed changes is here.
In terms of retirement income streams specifically, the main changes proposed are as follows:
- Transition to retirement streams to lose their tax status. Transition to retirement income streams were introduced in 2005 to provide limited access to superannuation for people wanting to move towards retirement by reducing their working hours and using their superannuation to supplement their income. In order to prevent workers of retirement age simply using this initiative to minimise tax, the government has announced that the tax exempt status of income from assets supporting transition to retirement income streams will be removed from 1 July 2017. Earnings from assets supporting transition to retirement income streams will now be taxed concessionally at 15%
- A $1.6 million transfer balance cap. From 1 July 2017, the Government will introduce a $1.6 million cap on the total amount of superannuation that can be transferred into a tax-free retirement account. The cap will index in $100,000 increments in line with the consumer price index, just as the Age Pension assets threshold does. Superannuation savings accumulated in excess of the cap can remain in an accumulation superannuation account, where the earnings will be taxed at 15%.
- Removing the aged based contribution rule Currently, people who are aged 65 to 74 are only able to make voluntary or non-concessional superannuation contributions if they meet a work test. The Government will improve the flexibility of the superannuation system by removing that work test, to make it easier for people aged 65 to 74 to contribute to their superannuation savings.
- More retirement income product choice. The Government will remove barriers to innovation in retirement income stream products by extending the tax exemption on earnings in the retirement phase to products such as deferred lifetime annuities and group self annuitisation products.
How many people the changes will affect
Australia’s total assets in superannuation topped $2 trillion in 2015, a new record. Over the 12 months to December 2015, superannuation assets in aggregate rose by 6.1% to reach $2,046 billion ($2.04 trillion) (ASN). Thanks to the superannuation guarantee (SG) scheme introduced in 1992, most workers in Australia will have some superannuation when they retire.
This is a much smaller increase than the 9.3% increase in the 12 months to December 2014, and one reason may be that our ageing population is now seeing the beginning of fewer working Australians in the accumulation phase of their superannuation journey. In fact, the ATO commented that there has been an 8% increase in the number of Australian SMSFs moving to the pension phase over the past 5 years.
“Together with raising your children and owning your own home, becoming financially independent in retirement, free of welfare support, is one of life’s great challenges and achievements,” said the Federal Treasurer during his speech.
“We need to ensure that our superannuation system is focussed on sustainably supporting those most at risk of being dependent on an Age Pension in their retirement, which is the purpose of these concessions.”