Playing catch-up is hard - but worth it
The clock is ticking. There are not all that many years left in the workforce. You wished you had done something about your super earlier. But there are ways to catch up. Salary sacrificing to super is still the best way to help make up for lost time.
Superannuation contributions are taxed at 15 per cent for most people. Most are paying a marginal rate of income tax of 34 per cent, which includes the 1.5 per cent Medicare levy. For each dollar sacrificed from pre-tax pay to super, 34¢ that would have been paid in income tax is swapped for the 15 per cent superannuation contributions tax.
Lower-income earners should try to take advantage of the co-contribution scheme. This is where the government pays 50¢ for each dollar of after-tax super contributions up to a maximum contribution of $1000, with a maximum government contribution of $500. The benefit from the government starts reducing once income reaches $33,516 and cuts out altogether at $48,516. The definition of "income" for the purposes of the co-contribution scheme includes any salary sacrifice contributions to super.
Those who have reached the superannuation preservation age, which will be between 55 and 60, depending on birth date, can take advantage of a transition-to-retirement strategy. Pre-tax income is salary sacrificed into super with some of this drawn down as a pension. This swaps income tax for the 15 per cent contributions tax on super. The strategy incurs costs, such as financial-advice fees, that are rarely accounted for in the glossy brochures that give case studies showing the before-and-after effects of the strategy. The strategy becomes much more effective from age 60, when money from super can be withdrawn tax free. Under age 60, the pension income is taxable at the person's marginal tax rate, less a 15 per cent tax offset.
Steps can be taken now in order to help maximise Centrelink entitlements later on, or to access tax-free retirement savings earlier. For instance, it may be a good idea for the younger spouse to transfer some super to the older spouse. That way, the couple will have access to more of their retirement savings, tax-free, once the older of the couple reaches age 60. Or it could be better for the older spouse to transfer to the younger spouse to maximise the older spouse's access to Centrelink benefits. There are strict rules on super splitting, such as age limitations on who can split. Up to 85 per cent of the previous financial year's concessional contributions can be put into a spouse's super account.
Dates for the higher superannuation salary sacrifice caps given in last week's cover story were incorrect. The $35,000 applies for the 2013-14 financial year for those aged 60 years and over. The higher cap will apply for those aged 50 and over in the 2014-15 financial year or a later financial year.