SUPERANNUATION … HOW TO RETIRE FINANCIALLY SOUND?

Many of us turn a bit of a blind eye to superannuation. We know it is there and we know it is ours – we just hope there will be enough when the time comes. The savvy investor is strategic about how to plan so that they can live a comfortable lifestyle in later years.

Let’s examine how much superannuation we need and how might we boost our superannuation savings, while also making the most of the tax benefits available within our superannuation system.

According to June 2021 figures from the Association of Superannuation Funds of Australia (ASFA), individuals and couples, around age 67, who are looking to retire today would need an annual budget of $44,818 and $63,352 respectively (Superannuation balances of about $545,000 for a single and $640,000 for a couple) to fund a comfortable lifestyle, or $28,514 and $44,170 respectively to live a modest lifestyle, which is considered better than living on the Age Pension. These figures assume you own your house outright, so you don’t have to pay a mortgage or rent.

Let’s examine the various superannuation contributions available that have favourable benefits:

These are voluntary contributions you may choose to make on top of what your employer might pay you under the superannuation guarantee if you are eligible.

You make these contributions using after-tax dollars and then claim a tax deduction for them when you are doing your tax return. Putting money into superannuation and claiming it as a tax deduction may be of benefit if you receive some extra income that you would otherwise pay tax on at your personal income tax rate.

Similarly, if you have sold an asset that you have to pay capital gains tax on, you may decide to contribute some or all that money into superannuation, so you can claim it as a tax deduction. This could help reduce or even eliminate the capital gains tax that is owing altogether.

If you are a low to middle-income earner and have made an after-tax contribution to your super fund, which you do not wish to claim a tax deduction for, you might be eligible for a government co-contribution of up to $500.

When your total income is equal to or less than $39,837 in the 2020/21 financial year and you make after-tax contributions of $1,000 to your super fund, you will receive the maximum co-contribution of $500.

If your total income is between $39,837 and $54,837 in the 2020/21 financial year, your maximum entitlement will reduce progressively as your income rises.

If your income is equal to or greater than the higher income threshold $54,837 in the 2020/21 financial year, you will not receive any co-contribution.

If you are earning more than your partner and would like to top up their retirement savings, or vice versa, you may want to think about making spouse contributions.

If eligible, you can generally contribute to your spouse’s super fund and claim an 18 per cent tax offset on up to $3,000 through your tax return.

To be eligible for the maximum tax offset, which works out to be $540, you need to contribute a minimum of $3,000 and your partner’s annual income needs to be $37,000 or less.

If their income exceeds $37,000, you’re still eligible for a partial offset. However, once their income reaches $40,000, you will no longer be eligible for any offset, but can still make contributions on their behalf.

This is where you choose to have some of your before-tax income paid into your superannuation by your employer, on top of what they might pay you under the superannuation guarantee.

It does mean a reduction in your take-home pay. However, as you will only be taxed 15 percent on the money you salary sacrifice (or 30 per cent if your total income exceeds $250,000), you will generally pay less tax on your salary sacrifice super contributions than you do on your income. This gets a bit tricky when you have short and medium term goals you might need the money for, so it is best to get advice on if and when you should put more money into your superannuation account.

People aged 65 and over can make a voluntary contribution to their superannuation of up to $300,000 using the proceeds from the sale of their home (if it is their main residence) – regardless of their work status, superannuation balance, or contributions history.

A tip on this, you actually don’t need to reduce the size or purchase amount of the new home you are getting, if you decide to get one, you just need to have enough funds to take advantage of this contribution if you happen to downsize.

This contribution is tax effective in the long term as funds in Superannuation are generally more tax effective than funds outside, especially once you have a certain amount of funds outside super. This contribution type allows you to put in about $110,000 every financial year, as long as your Total Superannuation Balance cap is less than the ATO specified amount.

It is usually a joggle to weigh up your options when you have a large amount at your disposal. There are ways to maximize your contributions over a given period which is usually the case for most individuals about to retire or retirement and trying to make contributions before age 67.

There may be advantages to rolling multiple superannuation accounts into one, but there are things to consider.

• One set of fees
• Less paperwork and administration time
• It may be easier to manage an investment strategy that meets your specific needs.

• Some funds may charge exit or withdrawal fees
• There could be tax implications
• You may lose some features and benefits you currently have, such as insurance cover.

Most superfunds allow you to choose from a range or mix of investment options and asset classes and choosing the most suitable option will typically come down to your attitude to risk and the time you have available to invest.

If you are young, you may have more time to ride out market highs and lows, and therefore be willing to take on more risk in the hope of achieving higher returns. Whereas if you are closer to being able to access your superannuation, you may prefer a conservative approach, as a share market fall could be harder to recover from.

Your superannuation should be working for you, so it is important to review it at least once a year and check things like:

• Fund performance (noting, past performance is not an indicator of future performance)
• Any fees you might be paying
• Any insurance you might have inside your superannuation and whether it suits your current needs.

• There are limits on how much you can contribute. If you exceed superannuation contribution caps, additional tax and penalties may apply.
• If you are over 67 years of age and want to make voluntary superannuation contributions, a work test applies. You must have worked for at least 40 hours within a 30-day period. A workaround is if you are eligible for the recent retiree work test exemption.
• The value of your investment in superannuation can go up and down. Before making extra contributions, make sure you understand and are comfortable with any potential risk you might be taking on.
• The government sets general rules around when you can access your superannuation. This is typically not until you reach your preservation age or meet a condition of release, such as retirement.

For further information please get in contact with us.