Did you know that superannuation assets in Australia total over $3 trillion?
Constant changes in super system, only creates confusion and requires keeping up with ongoing changes. The new financial year 21/22 will see some of the biggest changes in super system again.
Today I will go over changes that will affect you if your super is in the accumulation stage, so let’s check what has our government invented this time when it comes to our superannuation funds:
The Super Guarantee (SG) is to be increased from 9.5% to 10% on 1 July, 2021. This is a percentage of your wage that your employer has to contribute to your super. SG contributions have been frozen at 9.5% since 2014, despite having been originally scheduled to reach the 12% mark by 1 July 2019.
So it is positive to see that we started some kind of the progress. Increase is schedule to be annual by 0.5% until it reaches 12% in 2025.
The worry is that due to impact of covid many businesses may find the additional contribution of a great financial stress, which in turn could lead to lack of growth of wages, but this remains to be seen.
This is what the government calls “stapling”. From 1 July 2021 your super fund will automatically follow you, when you change jobs. The government argues this change will stop the creation of multiple super accounts and increase super balances.
Most employees in Australia can choose their super fund for employer contributions as well as their personal concessional and non-concessional contributions, but many end up using a super fund that is chosen by their employer – so called “default super funds” that include MySuper funds (basic super products with low fees). Employees who want to keep their old super fund when starting a new job generally have to fill out a form to advise their new employer of this decision.
My suggestion is, have your chosen fund, in most cases MySuper funds are too basic to accommodate for your real needs, in terms of good performance, asset allocation, diversification or even insurance. Otherwise, you might get stuck with a low performing fund or with inadequate insurance cover, which are essential part of your financial planning.
The benefit of “stapling” is avoidance of duplication of funds, hence duplication of fees, however sometimes there are reasons to have an alternative super, there is no such thing as one size fit all.
According to Industry Super Australian (ISA) the risk of “stapling” is that millions of members will end up with inferior super fund.
So, it is your responsibility to choose the best fund for you, do your research or get professional advice. We are all different, have different needs, in different stage of life, hence we all seek different benefits from our super. There is not one super on the market that will be the best for us all. It is essential to get it right, so don’t accept just a default, make your own decision.
I have created many articles to assist you how to choose the best suited fund as well as explain super strategies, tax and different types of contributions.
What is happening when you change jobs?
Your employer must find out from the Australian Taxation Office (ATO) if you have an existing super fund and then to make all super payments to that account, unless you notify your new employer otherwise.
If you don’t have a super account, and you don’t tell a new employer your choice, at that point your employer is allowed to create, on your behalf, an account with its nominated default superannuation fund.
Another part of the 2021 super reforms includes a requirement for super fund administrators to provide details about their investment decisions, how they justify their expenses and how they meet a new “best financial interests duty” test.
What that means is that super fund’s trustee must meet this test for its members within all its activity as your fund.
Super funds will also undergo an annual performance test with results being made public on a government website. Funds that fail the test in two consecutive years will be blocked from accepting new members.
The government will introduce an online portal that will rank MySuper products by fees and investment returns, so you will be able to check where your current super sits. You also might be prompted to consolidate your super if you have more than one account, but as I said before, in most cases this is a good advice, but sometimes there are reasons why you might consider having more than one account.
The testing regime will begin with MySuper products from July 2021 and expand to all super products from July 2022.
So is it a good idea to introduce this system?
At first glance it appears as a good measure, as super funds will have to act for your best interest, pay attention to fees and performance.
However, this puts a lot of pressure on the investment industry and super funds. No super fund wants to be named the worse fund. It is a very well-known fact that active investing is more expensive that passive investing. By introducing those last two items: fees justification and naming and shaming, most super funds, in order not to be “on the bad super fund” list, will step back from dynamic investing, will stop looking for tomorrow’s winners, will stop looking for great investment opportunities, and instead conservatively invest in yesterday’s heroes, as super funds will stop to try to outperform, as it carries the risk, cost more, but can reward with exceptional returns.
So really, we all can expect what I call “vanilla returns”.
What’s even more concerning is the fact of the impact this change in super fund’s investment activity will have on our economy. But somehow it appears our government cannot connect the dots that this $3 trillion dollar economy has an enormous impact on boosting our overall economy growth and dynamism.
Basically, by introducing this new “best financial interest” test, you might save few dollars a year in fees, but you will miss out on good performance that could increase your super balance by thousands of dollars over time.
Let’s now talk about some good news for a change:
The 3-year NCC Bring-forward contributions are being extended to age 67 with commencement on 1st July 2021 but will be implemented retrospectively to 1st July 2020.
This type of contribution can be very beneficial when you are nearing your retirement, so I will create a separate video explaining it in detail.
Please make sure you do not confuse bring-forward contributions with catch-up contributions.
Till now, if you contributed more than allowable concessional contribution limit of $25,000, which includes your employer contributions, the excess amount was taxed at your marginal tax rate, plus an additional penalty charge.
The idea now is to still add the excess concessional contribution to your personal assessable income and taxed at your personal MTR, with no penalty, and what’s more, you will be entitled for the non-refundable tax offset at 15% rate, which is superannuation contribution tax rate.
This is really a very positive step, as the mistake of over-contributing is very easy, especially due to the fact that the concessional contribution limit includes employer contributions, and if your income varies from week to week, it would be very difficult to keep track of all the contributions made if you have for example a salary sacrifice arrangement with your employer.
If you were in the unfortunate situation of having to apply for early super withdrawal under the former COVID-19 condition of release in 2020/21, you will be allowed to re-contribute these amounts back to super as non-concessional without it being counted towards your non-concessional contribution cap.
But this re-contribution is only allowed between 1st July 2021 and 30 June 2030. So as you can see, the government allowed 9 years for you to get back on your feet, save up and recontribute money back, that should have stayed in super for the purpose of your retirement.
My huge recommendation is to take advantage of this re-contribution opportunity.
Current rules state that the number of members in SMSF has to be less than 5, however from 1st July this will change to up to 6 members, which will allow bigger families to accommodate more members in one fund.
Be careful however if your state rules only permit up to 4 individuals as trustees of SMSF – for example this is the case in NSW.
If this affects you, consider a Corporate Trustee to avoid the issue, but make sure you receive a full advice concerning your fund.
So as you can see we have many changes again being introduced to our super funds, some good, some bad, some in my view completely unnecessary. So make sure you take advantage of the ones that will benefit you the most, but if unsure, you can always reach out and we can have a good chat about your super option.
And don’t forget to watch my next YouTube episode of AboutRetirementTV.
By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement