It will be particularly important for people within sight of retirement because they may miss out on some major opportunities to maximise their superannuation thanks to the Federal Government's plans to simplify super.
Between now and June 30 the window into the new era of superannuation is well and truly open but come July 1 next year many of the opportunities will close for good.
In May's Federal Budget the federal treasurer Peter Costello outlined a bold plan to simplify super. That sounded positive but sensibly there was a period of consultation with industry to get feedback on the moves and their impact. Because of the dramatic step of removing tax on the payment of super benefits for people over 60 a cap on contributions was introduced on budget night.
This week Costello released the responses to the submissions it received and the good news is that the Government has held the line and rejected many well-intentioned suggestions that would have come at the cost of complexity.
But there has been a major concession on the transitional arrangements particularly when it comes to contributing larger sums into the super system. The Government has accepted that some people had a legitimate financial planning strategy that involved building up assets outside the super system that were intended to be contributed into super as retirement loomed into view - and the assets involved were going to be more than the $450,000 limit.
The original proposal in May effectively killed those plans but the message has been received and understood in Canberra so between now and June 30, 2007, you can contribute $1 million in post-tax contributions providing you meet any applicable work tests. The annual cap will take effect from July 1 next year.
This is particularly good news for small business owners who perhaps have regarded the value of their business as their super and planned to transfer the proceeds of the business sale into super when they retired. For businesses that pass the capital gains tax exemption rules (typically those owned for 15 years) there is a separate once in a lifetime opportunity to contribute up to $1 million into super from the sale of their business. So a couple running a small business could potentially contribute up to $4 million into super next year.
Investors with rental properties are another group who could conceivably take advantage of the transition timeframe and who should consider getting advice to see whether that is the case.
The attraction of the "taxless" super regime as it has been dubbed in the media is strong but of course the challenge is to build up assets within the super system to enable you to take advantage of the tax-free benefit payments. For that reason the contribution work test remains in place for people over the age of 65. The aim here is to prevent a wholesale shift of assets into super from people already retired.
But even with that restriction the additional concessions will come at a cost to government revenue and the range of changes announced will add about $7 billion to the cost over the next four years, according to Costello's announcement.
Getting money into super was always going to be the financial planning challenge under the new rules. The thrust of the new rules is to encourage people to save regularly over their working life.
Suggestions that financial planners might be out of business thanks to the "simple" new rules is clearly ridiculous. The next year or so should be a boom time for financial planners because people are going to need help to review and adjust their individual strategies. Good financial advice will be at a premium.
There is also good news for people who are already drawing an allocated pension - you will be able to transfer to a new product without having to commute. However, people who opted for guaranteed complying pensions are stuck with the original product restrictions.
The Government is now on track to have legislation ready for Parliament before the end of the year which is impressive and should allow time for proper analysis of the detail before the June 30 deadline next year.
While the overall message remains positive, people with self-managed super funds are clearly on the Government's compliance radar. The tax office is getting an extra $112 million to "enhance compliance", a new single annual return will be introduced which will hopefully simplify fund administration but the sting comes with an increased levy and new penalties to be introduced to ensure accuracy of the information. Reporting obligations for auditors are also to change.
The proposals still have to be turned into law and very few people will have an idle $1 million to take full advantage of the transition time frame. But everyone will benefit from taking the time to review and plan their retirement savings before the next financial year dawns.
By Robin Bowerman
8 September 2006
Principal & Head of Retail, Vanguard Investments Australia