There is much misinformed comment that two of the Federal Budget’s core superannuation proposals will significantly hamper the ability to save in super. It has been stated that fund members who can afford to make large contributions will not be able to reach the new pension cap of $1.6m. However, modelling by Rice Warner gives a different impression.
The two proposals are, of course, the $500,000 indexed lifetime cap on non-concessional contributions (including past contributions from July 2007) and the cutting of the annual cap on concessional contributions to a flat $25,000.
What our modelling shows
As set out in the tables, Rice Warner has prepared eight case studies of fund members aged 40 with an intention to retire at 67 (the future eligibility age for the Age Pension). Four of the members are currently earning $100,000 a year with the other four earning $250,000 a year. Their existing super balances range from $100,000 to $250,000.
The modelling shows that each of the fund members can save at least $1.6 million in super, the Government’s proposed cap on amounts transferrable to a pension account.
Based on certain assumptions including an annual (long-term) fund earning rate of 6.5% and wage inflation of 4%, we calculate that:
- Five of the eight fund members in the case studies will reach at least $1.6 million without having to make any more non-concessional contributions. Significantly, the remaining three will need to make only modest annual non-concessional contributions.
- Each fund member will mainly rely on the combination of concessional contributions (in some cases markedly below the proposed annual cap on these contributions) and the investment earnings of their funds, utilising the benefits of compounding returns over 27 years.
We also note that members who are able to accumulate more than $1.6m can keep the excess funds in a concessionally taxed accumulation fund.
