Nick Bruining: Superannuation concessional contribution cap set to climb to $30k, but not everyone’s a winner

Superannuation investors should get ready for a lift in the amount they can dump into their retirement funds.

Wage data to be released this month is expected to confirm reports that the annual concessional contribution cap will rise from $27,500 to $30,000 from July 1.

That will have an automatic flow-on to other contribution cap limits, but a glitch in the indexation system means some will see their contribution limits actually decline.

Concessional contributions are those contributions where someone claims a tax deduction. Typically, it includes the employer superannuation guarantee payment, plus voluntary contributions such as salary-sacrificed amounts and personal contributions where a tax deduction has been claimed.

The annual cap limits are increased in $2500 increments when average weekly ordinary time earnings increase sufficiently.

Colonial First State technical services manager Craig Day said an increase from July 1 was highly likely.

“Based on the June AWOTE figure, it only needs to increase by 0.06 per cent over six months in the December quarter for the concessional cap to index to $30,000,” Mr Day said.

“So that’s pretty likely, given the increase to the minimum wage and other wage pressures building.”

The all-important figure is due on Thursday, February 22.

An increase in the concessional contribution cap will flow through to the non-concessional contribution cap, currently set at $110,000 a year. This is fixed at four times the concessional cap, so an increase to $30,000 would result in the non-concessional cap jumping to $120,000.

That in turn would also increase the amount available under bring-forward rules — an increase from the current $330,000 limit to $360,000 from July 1.

However, someone who has already made full use of the $330,000 and is within the three-year window for the rule, wouldn’t have an extra $30,000 to play with. You would only be able to make use of it if you haven’t taken full advantage of the concession and, in this case, a proportion would apply.

For example, if you made a $165,000 non-concessional contribution in the past three years you have used half of the available $330,000. Assuming the increase applies from July 1, your new limit would be the remaining $165,000, plus the 50 per cent of the $30,000 increase — or a grand total of $180,000.

If you are about to make a contribution and haven’t used the bring forward rules up until now, there’s another strategy you could employ.

You could make a $110,000 contribution now, wait five months until July 1 and then access the full $360,000 under the higher bring-forward concessions.

But even though the increased contribution limits might apply, not everyone is a winner. Those close to their transfer balance cap will be restricted on the amount they can contribute.

The TBC is a life-time limit that restricts the amount that can be moved into a tax-free retirement income stream, such as an account-based pension.

As individuals have a superannuation balance that gets closer to their TBC, the rules restrict how much non-concessional money you can pay in. For example, if your balance sits between $1.68 million and $1.78m, you can only contribute two years under the bring forward rules — or a maximum of $220,000 — instead of a possible $330,000.

Currently set at $1.9m, the TBC value is indexed to a different value, namely the consumer price index. Given Australia’s slowing inflation rate, this figure is unlikely to change on July 1.

Mr Day said it means the restricted contribution multiples will kick in at lower superannuation balances.

“We see the range dropping from $1.68m to $1.78m to $1.66m and $1.7m, respectively,” he said.

“During consultation back in 2016, industry feedback to Treasury was to not index the different caps by different factors. Unfortunately, they didn’t take on that advice and, therefore, we are left with this outcome that makes the system even more complicated.”

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association