The global pandemic has had a devastating effect on the personal finances of many Australians. Job losses and redundancies led to large numbers of people having to dip into their savings, feeding financial insecurity and uncertainty. But, while challenges exist, the future is looking brighter. We outline some key super strategies for you to discuss with your adviser to help put you back in control of your financial future.
If you’ve lost contact with your adviser over time, it’s time to reconnect. Professional financial advice is the first step in ensuring your super is – and continues to be – on track.
Next to your home, superannuation may be your most valuable asset, and one you may be relying on to provide a comfortable retirement. It’s important to look after it, especially as we’re living much longer than previous generations.
But what is a comfortable retirement? The Association of Superannuation Funds of Australia (ASFA) indicates singles require $44,412 per annum for a comfortable retirement, which equates to a final lump-sum balance at retirement of $545,000. Couples need $62,828 – or a lump sum of $640,000.
The importance of super becomes obvious when you realise the maximum age pension is just $24,770 a year for singles and $37,341 a year for couples. To give your super a boost – so you can enjoy the retirement you want – we’ve outlined some strategies that you can look at with your adviser to help ensure you’re in control of your financial future.
You can contribute to super either with your before-tax income (known as concessional) or your after-tax income (non-concessional). Just be aware that there are maximum amounts – called ‘contributions caps’ – you can contribute each year to avoid paying additional tax.
These are usually made by your employer into your fund as part of the compulsory Superannuation Guarantee or voluntary salary sacrifice arrangements, see ‘salary sacrificing’ below. You can also make personal deductible contributions and claim a tax deduction. Concessional contributions are taxed at 15% once they’re in the fund, which is a rate that is much lower than the marginal tax rate for most. The maximum amount you can contribute each financial year is $25,000 (increases to $27,500 from 1 July 2021) unless you are eligible for any unused concessional cap carry forward contributions. See ‘carrying forward your contributions’ below.
These are made either by yourself or your spouse using after-tax income. The non-concessional cap is $100,000 per financial year (increases to $110,000 from 1 July 2021) but if you’re under 65, you may be able to ‘bring forward’ up to two years’ of contributions ($300,000) in a single year, depending on your overall total super balance. Be aware that you must have a total super balance below $1.6 million (increasing to $1.7 million from 1 July 2021) at 30 June of the previous financial year to be eligible to make a non-concessional contribution. Lower total super balance thresholds apply if you wish to use ‘bring forward’ contributions. Your total super balance includes all super and pension interests. As you’ve already paid tax on these contributions, they’re not subject to the 15% ‘contributions tax’ in the fund.
Salary sacrificing involves you making a super contribution from your before-tax income, rather than receiving the money as your take-home pay. These contributions are taxed at a maximum rate of 15% in your fund. As this strategy reduces your taxable income, it can be tax-effective as well as being a way to boost your super.
If your partner’s super fund could do with a helping hand, you may be eligible to make a non-concessional contribution into it using your own money. This spouse contribution strategy not only helps your partner, but also provides you with the potential to claim a tax offset of up to $540 if your partner is a low-income earner.
The tax offset progressively reduces if your spouse’s income is above $37,000 and is completely phased out when their income reaches $40,000.
Concessional contributions splitting
You can also help your partner with their super by transferring up to 85% of your own concessional contributions into their fund, a strategy known as contributions splitting. These contributions usually include your employer’s Superannuation Guarantee, salary sacrifice, and personal deductible contributions on which you’ve claimed a tax deduction.
Conditions apply, such as the contributions generally need to have been made or received in the previous financial year, your spouse must be aged under 65 and if he or she has attained preservation age (58 years old), not retired. You cannot split using your non-concessional contributions
Carrying forward your contributions
While the concessional cap is $25,000 per financial year ($27,500 from 1 July 2021), you may not always have that amount to contribute each year. But if you have less than $500,000 in your super and pension funds at 30 June of the previous financial year, you’re allowed to carry forward any unused concessional contributions accrued since 1 July 2018 on a rolling five-year basis. After five years, any unused amounts expire. This means you may be able to contribute more than the $25,000 cap by using any unused ‘carry-forward’ amounts to make additional contributions.
It’s common when nearing retirement to sell your family home and downsize into a smaller property. But this strategy can also give your super a boost. If you are aged 65 or over, and have owned your family home for 10 or more years, you may be eligible to contribute up to $300,000 ($600,000 combined for a couple) of the sale proceeds into your super fund. This is known as a downsizer contribution. These contributions are not tax deductible, not counted towards your contribution caps.
Government co-contribution scheme
If the federal government wants to give you money, it makes sense to take advantage of it if you can. The government’s co-contribution scheme is where the government contributes 50 cents into your super fund for every after-tax dollar (non-concessional contribution) you contribute if you are a low or middle-income earner. The maximum amount the government will contribute is $500 depending on your income. You don’t need to apply either, as the amount is contributed automatically once you’ve lodged your tax return if you are eligible.
During 2020, the federal government allowed people to withdraw up to $20,000 over two consecutive financial years from their super fund. By December 31, 2020, when the scheme ended, more than 3 million Australians had withdrawn $36 billion from their super accounts.
Withdrawing your super can have a massive effect on your final super balance. The Australian Institute of Superannuation Trustees found a 30-year-old who withdrew $20,000 from their super would see their final balance reduce by many tens of thousands of dollars.
But as we’ve shown with these super strategies, there are many ways to get your super back on track. Taking control of your financial future – even by making small and sustained contributions – will go a long way towards giving you the retirement you’ve always dreamed of.
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Taxation law is complex and this information has been prepared as a guide only and does not represent taxation advice. Please see your tax adviser for independent taxation advice.
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