It is now more than three months since the superannuation rule changes came into effect allowing retirees up to age seventy-five to make super contributions even if they are not working. The responses from those eligible have been quite varied.
Super funds, once converted into pensions, earn tax-free returns and pay tax-free incomes to retirees. That’s a strong incentive to increase super balances. Up to $1.7 million can be held in a pension account.
Quite a few people are moving money from non-super investments into super. Some are contributing surplus cash. Inflation for the last year was 6.1 per cent. Term deposits now pay around four per cent, so they are losing purchasing power. Investments need to do better than that.
Bank interest rates have increased and share prices fallen causing some hesitation, but some super funds allow investment in term deposits.
Other people are selling managed funds and shares held personally to put the proceeds into super. The potential capital gains tax must be assessed but now is a good time to sell as prices are down so the CGT will be lower.
The rule change is a trigger to review old share portfolios and sell laggards. Perhaps sentimental attachments can be reconsidered. Are the shares paying the dividend income older investors need? Four per cent is a good benchmark. Shares can also be transferred into super without selling them.
Some people have decided to sell investment properties that pay low net income and put the proceeds into super. Many residential properties only net 2.5 to 3 per cent income after property costs, which usually isn’t enough.
Some retirees are using the new contribution rules to reduce the tax on super benefits paid to non-dependents after death. Money can be withdrawn from super tax-free and recontributed non-concessionally. This moves money from the taxable component into the tax-free component.
Inflation will come down because labour costs aren’t rising 6.1 per cent. There are indications of inflation peaking overseas. Surveys show US factory door prices declining. Both UK and US inflation have fallen slightly. This should lead to interest rates peaking and eventually declining too.
October is often a weak month in the share market, while the November to February period often sees good gains. Super funds are likely to earn better returns next year. Contributing now while values are down should prove beneficial. There are great opportunities with the new super contribution rules, but each person’s circumstances are different so their best options also differ. Personal advice can help.