What makes superannuation so super?
For expats wanting to save for retirement or looking for ways to reduce the tax burden on their savings, an Australian superannuation scheme can be attractive. If you are considering contributing to an Australian superannuation scheme, such as an SMSF, or transferring your UK pension funds to a QROPS SMSF, there are nine things that you need to know about.
Firstly, let’s look at what Australian superannuation is and why it is attractive.
What is Australian Superannuation?
A superannuation scheme, or a “super” as it is more commonly known, is a fund that Australian residents pay into during their working lives to support them financially in retirement. Investing into a super can mean significant tax savings for higher earners and those with a lot of money to invest. For those over the age of 60, retired and drawing a pension, a super can mean paying no tax at all.
In the case of an SMSF or Self-Managed Super Fund the members themselves are the trustees of the funds and, with the right advice and guidance, have control over how the money is managed. Running an SMSF is no easy task and only worthwhile when the size of the pot is substantial, so this option isn’t for everybody. For those who will benefit, however, an SMSF opens the door to a wider range of investment possibilities than other pension schemes.
So, what are the nine things that expats need to know about superannuation?
#1 Concessional and non-concessional contributions
Contributions made to a super fall within two categories: concessional and non-concessional.
Concessional contributions include employer contributions, including those made under a salary sacrifice arrangement and personal contributions claimed as a tax deduction. Concessional contributions are taxed at 15% and that can mean large savings compared to Australia’s marginal tax rate of up to 45% (plus an extra 2% for the Medicare levy), for high earners.
Non-concessional contributions are made with money that has already been taxed or money that was not subject to tax. These are also known as “after tax” or “undeducted” contributions. As this kind of contribution is not being claimed as a tax deduction and no other kind of tax benefit has been gained, then the full amount will reach the superannuation account without any further tax. Furthermore, depending on the level of taxable personal income, any earnings that arise from investing non-concessional contributions into a super will be taxed at a lower rate than earnings on investments or savings outside the superfund.
#2 Changes to the cap on non-concessional contributions
Until 30 June 2017, super members were allowed to make non-concessional contributions of up to $180,000 AUD per annum or, if they took advantage of the bring forward rule, they could make non-concessional contributions of up to $540,000 AUD in one financial year. Any contributions made over and above that cap would be taxed at the marginal tax rate.
Since 1 July 2017, the cap on non-concessional contributions has been dropped significantly to $100,000 AUD per annum or $300,000 AUD for those using the bring forward rule.
#3 Changes to the cap on concessional contributions
Until 30 June 2017 concessional contributions were capped at $35,000 AUD per annum for people aged 49 and over, or $30,000 AUD per annum for the under 49s. That cap changed and has been $25,000 AUD for people of all ages since 1 July 2017. Any contributions that exceed the cap are taxed at the Australian marginal tax rate with an excess concessional contributions charge (ECC) added on top.
#4 Double contributions tax for high earners
High earners with incomes above a certain threshold are liable to an extra 15% tax on concessional super contributions. Added to the 15% that everybody pays, means high earners have to pay 30% tax. Up until 30 June 2017, this rule applied to those with an “income for surcharge purposes” of $300,000 AUD per annum. Since 1 July 2017, that rule has affected more people as the income threshold has been lowered to $250,000 AUD per annum.
#5 Are you eligible for a QROPS SMSF?
Rules apply for those wanting to transfer their pensions funds into a QROPS SMSF. Whether or not you are eligible for a QROPS SMSF and whether it is the right option for you will depend on a range of factors from the size of your pension fund, your age or whether you have drawn from your pension already.
There are a few other notable points that UK expats may want to consider.
#6 You can transfer your funds in pounds?
Many expats don’t want Australian dollars. They want to make their super contributions in British pounds and be able to invest funds from the super in pounds sterling. This is exactly what you can do with an Australian super.
#7 Make the most of the lower value of the pound
The caps on concessional and non-concessional contributions are set in Australian dollars. With the current low value of the British pound compared to just a few years ago, that means those living in Britain can contribute more non-concessionally than before without exceeding the caps.
#8 Applicable fund earning
If you are a British expat living in Australia, any growth in the level of your UK pension from the date you arrived in Australia up to the date when you make a transfer into an Australian super is known as “applicable fund earnings”. This is treated as a concessional contribution to the fund but does not get counted towards the concessional contribution cap. That means more money for UK expats that could be taxed at a much lower rate than the marginal tax rate.
#9 You need expert advice
If you are going to invest in a super, you need expert advice. bdhSterling are well established, reputable experts in the field. You can download a free UK pension transfer to Australia starter kit from our website. The kit will help you compare benefits within your current UK scheme and alternative arrangements. You can also gain useful insight into other aspects such as specialist transfer strategies, what sort of paperwork you will be faced with in order to complete a transfer and ongoing investment management.
For the most up-to-date advice on Australian superannuation, get in touch with the experts at bdhSterling today.