Continued changes to the rules governing superannuation can be frustrating, particularly for those who prefer structure, order and little change. But despite adjustments to the rules, superannuation remains a powerful investment structure and it should continue to be at the top of your mind, especially if you are aged over 40.
When you begin to get closer to retirement it can be an effective use of your time to take a deeper look into your superannuation strategy. Although it’s a good idea to get on top of your superannuation at any stage of life, the final decade or two before retirement can be critical to achieving your financial goals. With an understanding of superannuation on your side you could very well achieve a large chunk of your financial goals…
In this article you will discover:
- Superannuation Preservation Age
- Tax treatment
- Contributions
- Superannuation guarantee
- Salary sacrifice or personal deductible contribution
- Insurance inside superannuation
- Superannuation Caps
- Other contribution benefits
Let’s examine these to help you understand the benefits of superannuation.
SUPERANNUATION PRESERVATION AGE
On the edge of most people’s tongues who are aged over 40 is generally, when can I access my super? Well to access your superannuation you must be of age. You might be wondering why you must be of age? Surely you’re mature enough to be able to handle your own money?
In one sense, it’s kind of like waiting for your 18th birthday all over again. For most Australians, there were so many benefits on the other side of 18. In this case you must be of age to access your superannuation and there are many benefits to that too!
You can choose to access your super when:
- You turn 65 – whether you have retired or not.
- You reach preservation age and retire.
- Or under the transition to retirement rules, while continuing to work.
There are very limited circumstances where you can access your super early. These circumstances are mainly related to specific medical conditions or severe financial hardship.
Your preservation age is not the same as your pension age. Your preservation age is the age at which you can access your super if you are retired (or have started a transition to a retirement income stream).
Your preservation age depends on when you were born.
See the table below to work out your superannuation preservation age.
TAX TREATMENT
Superannuation is extremely tax-effective as an investment structure for building and maintaining wealth. That’s largely because of the tax treatment of both income and capital gains from your assets held inside superannuation:
- In the accumulation and transition phase, investment income within your account is usually subject to a maximum of 15% tax, but if assets are held for longer than 12 months, they receive a 1/3 tax discount, reducing the effective tax rate to 10%.
- In the retirement phase, investment income and capital gains within your account are exempt from taxation, subject to the transfer balance cap. This superannuation cap puts a limit on the amount of superannuation that can be transferred from accumulation phase to pension phase
- If you’re 60 or over, any income payments from your retirement or transition phase account-based pension will be tax-free. Withdrawals from age 60 can also be paid tax-free. The superannuation preservation age is currently between 55 and 60, depending on when you were born. The Superannuation preservation age is a time when you may be able to access your superannuation, so long as you satisfy some strict criteria.
SUPERANNUATION CAPS AND SUPERANNUATION CONTRIBUTIONS
Superannuation caps are the limits placed on superannuation contributions.
Over the years, superannuation caps have come down, which means that you can generally contribute less to superannuation on an annual basis.
However, even with decreases in the concessional and non-concessional contribution cap limits, with careful planning these can still be leveraged to your benefit. If you exceed the caps, you may have to pay more tax.
The current concessional (before tax) contributions cap limit is $25,000 a year. Concessional contributions include compulsory employer contributions, salary sacrifice contributions and contributions for which a tax deduction has been claimed.
The current non-concessional (after tax) contributions cap limit is $100,000 a year. These include personal contributions that have not been claimed as a deduction, spouse contributions and contributions that exceeded your before-tax cap if not released from the fund.
SUPERANNUATION GUARANTEE
For most employees, their employer must contribute 9.5% of their gross salary each year as a mandatory Super Guarantee contribution. This amount will be gradually increasing to 12% from 2021 to 2026. These contributions count towards your concessional contribution superannuation cap limit. Depending on your personal circumstances, the benefits of the Superannuation Guarantee in building wealth for retirement can be considerable when considering the long-term impact of these contributions on your superannuation account balance.
SHOULD MY EMPLOYER DO IT OR SHOULD I?
It’s possible to make additional contributions through salary sacrifice arrangements and/or personal deductible contributions.
A salary sacrifice is when you and your employer pay a portion of your pre-tax salary as an additional concessional contribution. A personal deductible contribution is a personal contribution made to a super fund that can be claimed as a tax deduction on your individual tax return.
These can be huge benefits for building wealth for retirement, and depending on circumstances, could increase your take-home pay.
However, it’s important to check your employment agreement to see if it specifies a minimum level of employer superannuation contributions because in some instances, your employer may count your salary sacrifice contributions towards their mandatory Superannuation Guarantee obligation.
OTHER WAYS YOU CAN BENEFIT FROM CONTRIBUTIONS
There are other government incentives to build wealth within superannuation, for individuals and couples, by taking advantage of other contribution benefits. These include:
- Spouse Contribution: If your spouse has no source of income or is a low-income earner, you may be able to claim a tax offset of up to $540 by making non-concessional contributions to your spouse’s superannuation account.
- Government Co-Contribution: If you earn less than $51,813 per year (before tax) and make non-concessional contributions to your superannuation account, you may be eligible for a co-contribution from the Government to a maximum of $500
- Contribution Splitting: You could transfer up to 85% of your concessional contributions for the previous financial year to your spouse’s superannuation account. This could be a valuable strategy for couples to increase their tax-free income in retirement, increase future social security benefits or access superannuation funds sooner.
INSURANCE INSIDE SUPERANNUATION
It’s possible to establish personal insurances inside and outside of superannuation, particularly if your cash flow is restricted. You can hold certain types of personal insurance (Life, Total and Permanent Disability, and Income Protection, for instance) and fund the required premiums from your superannuation account balance and/or contributions. The premiums for these types of personal insurance are usually tax-deductible to your superannuation fund.
Prior to making such arrangements, it’s important to understand the impact of insurance premiums on your superannuation account balance over time, as well as restrictions imposed by superannuation law on personal insurance policies, and the tax treatment of some payouts upon a successful insurance claims.
FINAL THOUGHTS
Despite recent changes, such as the reduction in the concessional and non-concessional contribution cap limits and the introduction of a “total superannuation balance” and a “transfer balance cap,” superannuation remains a powerful investment tool.
The advice in this blog is general and each person’s situation is different. If you have specific questions regarding this article, or would like advice to map your path to achieving your financial goals, please contact us.
This blog article provides general information only. The content does not take into account your personal circumstances, financial situation or needs. You should consider taking financial advice tailored to your personal circumstances. Financial Framework has representatives that are authorised to provide personal financial advice.
