Worried about the cut in annual contributions caps to $25,000? Don’t be – Here’s why

In the federal budget released on Tuesday night, the superannuation sector came in for what it saw as major threats to people being able to support themselves in their retirement.

But the changes aren’t as bad as they are being made out to be by a number of industry bodies.

Those changes include a $1.6 million limit on the amount that people can ‘roll over’ into the retirement phase, cutting back transition to retirement benefits, cutting the annual limits of how much people can put into their super at concessional tax rates, and limiting the total non-concessional amount people can add to their super.

We covered the changes to the $1.6 million cap here – but essentially that is only a limit on the tax-free balance, and retirees can still have more than that amount in super (kept in the accumulation phase).

In this article, we’ll have a closer look at the cuts to the annual concessional caps to $25,000 (currently $30,000 for people under 50 and $35,000 for those 50 and over).

The Association of Superannuation Funds of Australia (ASFA) says the changes have significant ramifications for superannuation, with more than 560,000 people affected. ASFA also says it doesn’t support the cuts to the concessional caps, despite less than 2% of people with superannuation making contributions above that level.

CEO Pauline Vamos has told The Australian that a significant number of individuals with low balances are attempting to catch up. “Around 36,000 women with balances less than $200,000 in 2013-14 were making contributions greater than $25,000,” she says.

But it seems Ms Vamos and the superannuation industry haven’t digested all the changes to super, including a critical one that allows workers to catch up their super for years where they have contributed less than $25,000.

As the budget paper says, “From 1 July 2017, the Government will allow individuals to make additional concessional contributions where they have not reached their concessional caps in previous years. Amounts are carried forward on a rolling basis for a period of five consecutive years, and only unused amounts accrued from July 1, 2017, can be carried forward.

Allowing people to carry forward their unused concessional cap provides them with the opportunity to ‘catch-up’ if they have the capacity and choose to do so.

Essentially that means that Australians can contribute up to $125,000 concessionally every five years in any annual amount they choose and should see more people utilise their annual limits better.

We should also not forget that people also have the option to put in another $500,000 after tax into their super over their lifetime – that doesn’t count towards the annual concessional cap.

Foolish takeaway

The superannuation system is designed to cut down the amount of government spending that would ordinarily be required to support older people in retirement with a pension. However, thanks to the generous concessions, many had been abusing the system – with a number of superannuation accounts already holding more than $2 million.

Plugging those loopholes were necessary, and while it doesn’t mean the government has necessarily got it right this time, the changes aren’t as bad as the super industry makes out.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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