Changes to superannuation have potentially made life more difficult for people who have lost their super during a divorce. In the middle of a federal election campaign, and just after the government’s Budget, there is a lot of political rhetoric flying about. It’s easy to tune out.
But the government is proposing changes to superannuation – actually, the biggest changes to superannuation in years, and the consequences for some groups of people will be large.
Getting divorced is rarely anything except a financial disaster. And the Coalition has – probably unwittingly – made it far worse.
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Divorce and Superannuation
The superannuation splitting law treats superannuation as a different type of property. It lets separating couples value their superannuation and split superannuation payments, although this is not mandatory. Splitting does not convert it into a cash asset – it is still subject to superannuation laws (for example, it is usually retained until retirement ages are reached).
The Family Law Act 1975 and the Superannuation Industry (Supervision) Act 1993 (SISA) allow an interest in superannuation or a super payment to be divided or split by agreement or court order in the event of a relationship breakdown.
Split a superannuation interest (typically a member’s superannuation account) into two benefits via a ‘payment split’ or an ‘interest split’. A payment split means that the super account can be paid (that is, a condition of release is satisfied, such as retirement). More typically, an interest split will be used, which means both parties receive a superannuation interest. The ex-spouse receiving the new benefit can leave the super interest in the same fund (if the super fund rules allow this), or transfer the interest into another super fund. If you’re both members of the same self-managed super fund (SMSF), the likely option is that one member will transfer his or her benefits into another SMSF, or into a large commercial run super fund.
Flag the benefit and defer decision until another time. By flagging the super benefit, this allows a couple to protect each of their interest while waiting for a key event to occur, such as impending retirement, or where the valuation of an asset (if members of a SMSF) is finalised. Upon this key event the exact value of the benefit will be known and the trustee of the super fund can then deal with the super account according to a later agreement made by the couple.
Take super into account, but leave untouched. In the past, superannuation was treated as a financial resource rather than an asset of the marriage. Couples can choose to continue taking this approach, and divvy up other assets of the marriage/ relationship to take into consideration the value of the super account rather than splitting a superannuation benefit.
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The Budget, Divorce and Superannuation
To try and simply otherwise very complex language, if in the past nine years, you’ve lost your super as part of a divorce settlement – perhaps because you’ve kept the house – it’s brutal. You’ll struggle hard to rebuild your super balance. Effective immediately is a new lifetime cap, set at $500,000, on non-concessional (after-tax) contributions.
But this is not just the case if you’ve already used up your $500,000 lifetime after-tax limit; a reduction in allowable before-tax (concessional) contributions could affect you, too. The limit is planned to move from $30,000 to $25,000 a year from July 2017. Gone also will be the ability for those aged over 50 to shovel in $35,000 a year when finally they can afford it.
There was previously no lifetime limit on non-concessional contributions, with the annual limit of $180,000 effectively enabling those few who could afford to maximise the annual cap each year to build up super balances worth millions of dollars.
In short, many divorcees who have lost their super now also stand to lose the ability to replace it.
And with an average divorce age of 44, says the ABS, they need to be able to do so fast.
What about future divorces, remembering this is the fate of one in three marriages? As Marshall Brentnall from Evalesco Financial Services puts it: “It’s more likely you’ll see proportional splits – so the super will be in the mix and the home will be in the mix [and will have to be sold]. If one party has a particular emotional tie to the home that could be problematic.”
This may mean that in the event of a divorce, where once the family home could be kept, it will have to be sold.
A Case Study
by Strategy Steps, adviser to the advisers.
A couple, both aged 50 and earning $80,000, divorces. The husband has $300,000 in super and the wife has $700,000, because of a $500,000 inheritance a few years ago that she paid into her super as a non-concessional contribution. In the settlement, she gets the $1 million house and he gets all the super.
The wife spends the next 17 years, until pension age, exhausting all available allowances in a bid to rebuild her super balance (and earns a net 7 per cent a year).
Under current rules: She pays in $35,000 a year in concessional contributions (employer and salary sacrifice) and also $2450 a month as a non-concessional contribution (this totals to another $500,000 in after-tax contributions).
Her super balance at age 67: $1.12 million.
Under proposed rules: She can pay in only $25,000 a year in concessional contributions and nothing after tax – even though she has been left with no super, she’s used her lifetime non-concessional limit.
Her super balance at age 67: $401,541. This is well below the $545,000 that the Association of Superannuation Funds of Australia estimates a single person needs to fund a comfortable retirement (and it’s a conservative estimate).
Of course, the $500,000 our case study was going to put into super could instead be invested outside of it but the earnings would be taxed at double the amount and income could be taxable in retirement (compared with tax-free super pensions).
Putting a lump sum into superannuation is not as far out of reach as you might think. This could easily be the case for omeone who has sold an investment property, cashed in a business or come into an inheritance.
As Strategy Steps’ Louise Biti says: “The closer the person is to retirement or the lower their remaining balance when they split, the harder it will be to rebuild.”
In any case, an even super split would give each spouse a sporting chance.
This only reiterates the fact that you need excellent professional advice. Whether it’s a financial planner for advice about how to invest, a family lawyer to help guide you through divorce, a wills and estates lawyer to help you with estate planning and an accountant to guide you through the tax consequences, we firmly believe that it’s important to protect yourself where possible.
If you need help with family law or estate planning, please contact our friendly team today. We offer a free, ten minute phone consultation.