Does scrapping the $500k lifetime limit for non-concessional contributions make sense?

16 Sep 2016

Meg Heffron

Managing Director

Big news this week with the Government announcing a total backflip on one of its big 2016 Federal Budget measures – the lifetime limit on non-concessional contributions.

Unfortunately – in my view at least – it has replaced an unpopular and unreasonable measure with something that has plenty of weaknesses itself.

The “unreasonable” aspect of the original announcement was not the fact that it sought to limit non-concessional contributions more than they are at the moment. It’s inevitable that we will see a winding back of superannuation concessions in all shapes and sizes and this will have to include constraining optional contributions.

No. The “unreasonable” part was twofold – the limit was relatively low (only $500,000 forever) and it looked backwards and counted contributions made nearly 10 years ago. You can argue all you like that the measure wasn’t retrospective because it didn’t actually impose a penalty for past behaviour but that doesn’t change the fact that it definitely felt so!

The change is definitely a good one – the original proposal was nuts. But I see the move to limiting contributions based on the size of the individual’s account balance size as a backward step.

Dollar limits are always tricky – when do you measure them? what happens if someone hovers above / falls below? How do you handle situations where someone contributes in July thinking they can only to discover that their balance at the previous 30 June actually exceeded the limit? How do you avoid manipulation without creating oodles of complex legislation?

Personally I think the lifetime limit was conceptually a great idea. It’s just that the specific version proposed by the Government was unreasonable.

An annual cap (even with bring forward opportunities) assumes everyone saves for retirement in a fairly linear fashion, steadily adding to their super each year (or in three year lumps). In real life, we often don’t save much when we’re young and have more interesting things to do with our money. We take time out to travel, study and have children, we lose our jobs when we’re not expecting it and we sometimes retire earlier or later than we’d like to. Just as life doesn’t always run in straight lines, nor should our contribution caps.

A lifetime cap would allow the Government to achieve its purpose – limit the extent to which each individual can access the super tax concessions – but without making assumptions about how retirement savings are built up over time.

I expect the Government would have faced vastly less criticism for the original measure if only they had made the limit larger (let’s say somewhere between $500,000 and $1m) and started it from 1 July 2017. Unfortunately by coming out with something ridiculous in the first instance and then taking too long to back down, they have ended up saddling us with something less than optimal. I expect that the generally positive reaction to the latest announcements largely reflects the community’s relief that the original proposal has been ditched rather than a strong preference for the annual contribution cap process.