Super contributions for over 65s
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- By Suzie Barnaby
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- 19 February 2021, 3:15 PM
There have been a number of changes to superannuation legislation that may help improve the retirement position for individuals and couple who are retired or nearing retirement.
Downsizing Incentives for Seniors
From 1 July 2018, individuals aged 65 and over can make a personal contribution of up to $300,000 using proceeds from the sale of a family home, which has been owned for at least 10 years, into their superannuation. These new contributions can be over and above any other voluntary contributions the person is able to make under the existing contribution rules and concessional and non-concessional caps.
The contribution must be made within 90 days of the disposal of the home (i.e. from settlement date). It is a once-only application and cannot be used for any future sale of another main residence.
Subject to the $300,000 cap, an individual can make as many downsizer contributions as they wish. However, the contributions can only ever be made from the proceeds of one sale of a dwelling. This allows individuals to make contributions to different superannuation providers if they choose to do so.
Note: If the contract of sale is less than $300,000 then the individual can only contribute that amount of sale proceeds into superannuation. Funds from other sources cannot be used to "top up" the contribution to $300,000.
Under the downsizer rules certain contribution restrictions have been lifted such as the 40-hour work test. This means individuals over age 65 can contribute up to $300,000 regardless of their work situation as long as the home has been owned for a minimum of 10 years. A couple can contribute up to $600,000 for the same home via the downsizing rules. The only requirement in this respect is that each individual is over age 65 at the time the contribution is made.
We are seeing this strategy being used more frequently by clients who have sold their residences in Sydney or Melbourne and moved up to live locally in Port Macquarie, South West Rocks, Bonny Hills or Lake Cathie.
Social Security Assessment
Age pensioners should exercise caution before considering this strategy.
The full value of a family home is exempt from both the Income and Assets test for social security purposes. However, any remaining sale proceeds (after a new home is purchased) will be assessable regardless of whether funds are contributed into super or not. Therefore, a sale of the existing family home could actually result in the individual, or couple, losing some or all of their age pension benefits. If full benefits are lost so too is access to the pensioner concession card.
Work Test Exemption for Recent Retires
From 1 July 2019, individuals who are over age 65 and retiring may be exempted from the work test for the following 12 months after the financial year of retirement, if the individual does not have more than $300,000 in total within super.
The total super balance threshold of $300,000 is calculated on 30 June of the financial year of the individual's retirement year. There is no requirement for that individual's total super balance (TSB) to remain under $300,000 for the duration of the following 12 month 'exemption' year.
Existing concessional and non-concessional contribution limits will continue to apply to contributions made under the work test exemption. Carry forward 'catch up' concessional contributions can also apply.
Example - How the work test exemption will work
At the age of 68, Gus retires from full-time work on 1 June 2020. As he would not meet the work test in the 2020-21 financial year, Gus would currently be prevented from making any voluntary super contributions after 30 June 2020.
Gus's total superannuation balance is $150,000 at the end of the 2019-20 financial year. Thanks to the new Regulations Gus is eligible to make contributions under the work test exemption from 1 July 2020 to 30 June 2021.
As Gus had not reached his concessional contribution cap over the past 2 years, having contributed only $18,000 in 2018-19 and $12,000 in 2019-20, under the existing carry forward arrangements and new work test exemption Gus can contribute up to $45,000 at concessional tax rates in the 2020-21 financial year.
Gus is also able to contribute up to $100,000 in non-concessional contributions in 2020-21.
TSB as at 30 June 2020
Plus balance of Carry-forward Concessional Contributions
Plus Non-Concessional Contributions
|Total Super Balance as at 30 June 2021
Instead of retiring with just $150,000 in super, Gus has been able to increase his balance to $295,000 putting him in a better position financially for retirement.
No Work Test for Persons age 65 & 66
Regulations have been made which exempt individuals age 65 & 66 from having to meet the 40-hour work test for super contributions, effectively bringing the age limit in line with the increasing age pension age (of 67). The regulated changes are effective from 1 July 2020 and are summarised as follows.
- Any person under 67 can make personal contributions — that is, there is no work test condition (however, if the person is under age 18 and claiming a deduction for the contribution, the work test condition will apply).
- A person who has reached age 67 but not age 75 can contribute if the person has been “gainfully employed on, at least, a part-time basis” during the relevant financial year. Under SIS Reg 7.01(3) a member is gainfully employed on a part-time basis during a financial year if the member has worked at least 40 hours in a period of not more than 30 consecutive days in that financial year. The trustee cannot take prospective employment into account - the member must have worked at least 40 hours in the financial year before the trustee can accept the contribution.
The change means a person who is age 66 as at 1 July of a year and turning age 67 during the financial year no longer has to worry about meeting the work test if making contributions after their 67th birthday, in that financial year.
It also means the person can trigger the 3-year bring forward rules in that same year and contribute up to $300,000 - as long as they were 66 on 1 July of that year.
Can a person already age 65 or 66 as at 1 July use the 3-year bring forward limits?
At this stage no, however, legislation is currently sitting with the Senate which, if passed, will allow individuals age 65 and 66 the ability to use the 3-year bring forward limits.
How does the change affect the work test exemption for recent retirees (as noted in 2.)?
In relation to the relatively new rules that allow recent retirees age 65 or over the ability to contribute to super in the next 12 months after retirement where their total super balance is less than $300,000 as at the previous 30 June, the work test exemption for persons age 65 and 66 effectively negate this strategy.
However, if a recent retiree is over age 67, then the 12-month exemption from the work test may still be useful. As mentioned, eligibility to this exemption depends on the retiree's total super balance. It cannot be greater than $300,000 as at the previous 30 June, so this strategy will be limited to a smaller number of retires.
Find out more
Suzie is a Senior Financial Planner at Morgans Port Macquarie. Suzie takes a highly personal and holistic approach to understanding her clients' financial situations and needs. Suzie specialises in wealth creation strategies and retirement planning.
If you’d like to discuss how this may affect your situation or what opportunities may be available to you, contact Morgans Port Macquarie office on [email protected] or via (02) 6583 1735.
General Advice warning: This article is made without consideration of any specific client’s investment objectives, financial situation or needs. It is recommended that any persons who wish to act upon this report consult with their investment adviser before doing so. Morgans does not accept any liability for the results of any actions taken or not taken on the basis of information in this report, or for any negligent misstatements, errors or omissions.