Federal Budget 2017 did affect the PSS
Many of the super changes that were announced in the May 2017 Federal Budget came into effect on 1 July 2017. Several clients who are members of the PSS have rung us concerned about their future entitlements and their super strategies.
Generally our advice to them is to discuss their goals with us to determine their best strategy. While the changes to super will have an effect, for the most part the PSS remains a generous retirement scheme. In addition, many of the strategies that we have recommended continue to be worthwhile to boost retirement assets.
Accumulate super outside to boost your retirement assets
Making salary sacrifice contributions into a retail super fund accumulates additional retirement assets. It also generates a flexible Account Based Pension at retirement. The Federal Budget changes have an impact on this strategy. This is because the new lower limits on concessional contributions and the $1.6 million cap on pension assets.
Let’s discuss these issues separately.
Salary sacrifice still an option
There has always been a cap on concessional (tax deductible) super contributions. From 1 July this cap will be $25,000 for everyone who is eligible to contribute. In the past, only the Productivity component of an employer’s contributions into the PSS has counted towards this cap. However, your nominal PSS contributions are now counted towards the cap. This is based on a complex formula taking into account your income, length of service and member contribution levels.
However, this doesn’t mean the strategy is off the table. The amount that a member of the PSS can contribute to another fund has been reduced. However, it is still a worthwhile strategy to consider – particularly if you are over age 50.
Additional super will give you flexibility in retirement
From 1 July 2017, there will be a $1.6million cap on the amount of retirement assets that can be transferred into a pension, where investment earnings are tax free. Certain defined benefit income streams will be counted in the cap such as those that can be taken as part of a retirement benefit from the PSS. To convert these pensions to a lump sum equivalent a factor of 16 will be used. So this means that if your defined benefit pension pays you more than $100,000 per annum you will have used this cap in full. Excess amounts above the cap must be rolled back into super. This roll back is not possible with a defined benefit fund, so if you’ve reached the cap there will be additional tax applied to your income payment from the PSS.
What it also means is that if you receive an income of $100,000 or more as a PSS income, you will not be able to convert any super you have in another fund into an income stream.
PSS and second fund a retirement strategy
However, Andrew Boulds, Senior Financial Planner from Milestone still believes that this is a worthwhile strategy. “Even though you can’t convert your super outside of the PSS into an income stream, you can still take out lump sum amounts (assuming you are older than the preservation age). If you are over 60 those amounts will be received tax free. In addition, the 15% tax on fund earnings is still a very attractive rate for many PSS members. So, there is still scope to incorporate both the PSS and another super fund into your overall retirement strategy”, Andrew says.
The main benefit of having another fund outside of the PSS is the flexibility it gives you. Andrew remains a fan of this strategy “It is so important to be debt free when you retire, so accumulating wealth in a super fund outside the PSS will give you a lump sum to help repay any debt and provide for things like one off surgeries, replacement cars, helping family members and travel”, he says.
For more information or to discuss your PSS super fund, please contact Milestone Financial on (02) 6102 4333.