Playing catch-up is hard - but worth it
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 The strategy becomes much more effective from age 60, when money from super can be withdrawn tax free.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.
CORRECTION
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.
Frequently Asked Questions about this Article…
Salary sacrificing to super is often recommended because concessional super contributions are taxed at 15% for most people, whereas many earners pay a marginal income tax rate around 34% (including the 1.5% Medicare levy). That means each dollar moved from pre-tax pay into super swaps a higher income tax bite for the lower 15% contributions tax, making it an efficient way to boost retirement savings.
For typical earners cited in the article, each dollar salary-sacrificed that would otherwise be taxed at about 34% instead attracts the 15% super contributions tax. In other words, you effectively reduce tax on that dollar by roughly 19 percentage points (34% minus 15%), increasing the amount that goes into your super.
The government co-contribution pays 50 cents for every dollar of after-tax super contributions up to a $1,000 personal contribution, giving a maximum government contribution of $500. The co-contribution benefit starts to reduce once your income reaches $33,516 and cuts out entirely at $48,516. Note that for the scheme the definition of "income" includes any salary sacrifice contributions to super.
A transition-to-retirement strategy is available to people who have reached their superannuation preservation age (between 55 and 60 depending on birth date). It involves salary sacrificing pre-tax income into super and drawing some of it down as a pension. The idea is to swap higher marginal income tax for the 15% contributions tax on super, but the strategy has costs and tax consequences that change with age.
Yes. The strategy usually incurs costs such as financial-advice fees and other charges that are often not shown in glossy case studies. It becomes much more effective from age 60 when money can be withdrawn tax-free. Before age 60, pension income is taxable at your marginal rate, less a 15% tax offset, which reduces the tax advantage.
Couples can take steps now to influence future access to tax-free retirement savings or Centrelink entitlements. For example, the younger spouse might transfer some super to the older spouse so the couple can access more tax-free savings once the older spouse turns 60. Alternatively, transferring to the younger spouse may help maximise the older spouse's Centrelink benefits. There are strict rules and age limitations on super splitting, and up to 85% of the previous financial year’s concessional contributions can be split into a spouse’s super account.
According to the article, once you reach age 60 money from super can be withdrawn tax-free, which makes strategies that funnel savings into super much more effective. Before age 60, pension income remains taxable at your marginal rate, but you receive a 15% tax offset on that pension income.
A correction in the article notes that the $35,000 higher cap applies for the 2013–14 financial year for people aged 60 and over. The higher cap will apply for those aged 50 and over in the 2014–15 financial year or a later financial year, per the correction.
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