Summary: If you’re in your 50s and haven’t yet made a plan for retirement, it’s not too late. Consider maximising concessional contributions, reducing non-deductible debt, selling assets to get money into super, spreading your eggs across more than one basket – and don’t forget estate planning.
Key take-out: The run-up to retirement can add a substantial sum to your super, while saving you tax along the way and in the future. But don’t kick the can down the road.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.
You’ve hit 50, maybe 55, and it’s dawned on you that you’ve got just a decade until retirement.
This realisation, though creeping up for years, can wake some people at night in a sweat. For others, who pushed it to the back of their minds for so long, the looming deadline seems to have raced forward from nowhere.
What do you do?
Firstly, don’t panic. If you’ve got a decade to retirement, you’ve got time. I’d rather you had two decades, but we can work with just the one. Here’s how.
1. Make a plan
Whoops. Arguably, there should have been one all along. But, if you haven’t done one, it’s not too late.
The final run-up to retirement is a powerful time for creating wealth and better retirement outcomes. This comes as people tend to have higher disposable incomes, as kids are financially done and dusted (or nearly) and the mortgage is usually paid down.
The plan will involve some, or many, of the following considerations. If you need someone to put it all into perspective for you, and don’t believe you could do it yourself, see a well-qualified financial adviser.
But sitting down to map out a plan is an important first step that will give you some focus for the years ahead.
2. Maximise concessional contributions
Many of the items on this list are things that can, arguably, be done at any stage.
But concessional contribution (CC) limits are use-it-or-lose-it financial caps that, once gone, are lost forever. You can’t use ones from previous years.
Doing what you can to maximise your concessional contributions is critical. It is the most tax-efficient form of super saving, which is why the government restricts CCs so heavily.
If you haven’t already, look at your CC caps and see what you can do to get as close to your limits as you can manage. For those aged 49 or more on July 1, 2015, you have a CC cap of $35,000 for this financial year. Sure, putting money into super means you can’t touch it for a while, but the tax savings, given access is not that far away, should be calling you like a siren. Swap your marginal tax rate of up to 49 per cent for a 15 per cent super contributions tax rate.
If you can put in another $15,000 a year, you’ll save up to $5100 a year in tax (the difference between the 49 per cent marginal tax rate and the 15 per cent rate for super contributions). You won’t lose your money forever, it will continue to grow over time, and its earnings will also be taxed at lower rates.
If you’re self-employed, super contributions are of particular importance, and have usually been particularly neglected. If your business is finally doing well, speak to an adviser about how to make the most of contributions limits now and reduce tax. Too many self-employed don’t. If that’s you, make the change.
3. Consider asset sales to get money into super
Yes, selling assets sets off capital gains. But sometimes, you were thinking about doing it anyway. And other times, it will just make sense, particularly if you can get the money into super.
Why? Because the money that you earn from the pension fund you will eventually turn on after age 60 will be tax free. Whatever assets you have in your pension fund do not pay tax on income, or any capital gains made.
It can be worth considering selling an asset outside of super, with the aim of putting the proceeds into super.
And, if you have a choice as to where to purchase an investment, post-50, it will often make more sense to purchase a given asset inside a super fund (particularly a SMSF), rather than outside.
If the asset produces income, it will be taxed at only 15 per cent inside a super fund (versus higher marginal tax rates) and then potentially 0 per cent in a pension fund.
If you hold assets outside of super that don’t have particularly large capital gains, run the numbers on whether it would be better to sell the asset to get the money inside your super fund to purchase a similar asset, by making non-concessional contributions.
Non-concessional contributions are the after-tax contributions limits of $180,000 a year, or $540,000 using the three-year pull forward provisions, for those who are eligible.
Seek specific advice, particularly in regards to the tax consequences.
4. Reduce non-deductible debt
Contrary to popular belief, you don’t necessarily need to reduce all debt as you make your final lunge into retirement.
But certainly, you should have, as part of your plan, actions to reduce your non-deductible debt. That is, debt that you can’t claim a deduction for, such as your home, cars, credit cards, etc.
Deductible debt (investment property and share loans) are fine to continue to keep, if you have assessable income outside of super. But if you don’t have any non-deductible debt left, then perhaps attacking your non-deductible debt would be worthwhile.
5. Don’t put all of your eggs in the super basket
Super rules are subject to change.
Continue to make non-super investments. The main reasons for doing so are because you have greater control over them and because negatively geared investments are generally going to have better taxation outcomes outside of super.
Yes, you should be pumping money into super, and as much money as you can. And this is because the tax rules give it a huge advantage over non-super investing.
But it’s also a balancing act. The wealthier you are, the less that you should risk having everything in super – governments could, potentially, come and tax pension funds at a moment’s notice.
Super and pension funds are always likely to be taxed more than non-super investments, but it is something to weigh up.
The former Labor government tried to start taxing pension funds above a certain figure. And they have a policy to attempt to do so again in the future. And who knows what the new Turnbull Government might try to do!
You are going to have some of your wealth tied up in your home, some tied up in your super fund. The truly wealthy should also be planning to have a suitable amount invested in non-super investments. Sure, you’ll pay a bit of extra tax, but it’s about eggs and baskets.
6. Don’t ignore estate planning
Estate planning is very broad. From the death benefit nomination on your super fund, to where you are leaving your non-super assets, to the proceeds of any life insurance you might hold, to what’s happening with control of any companies or trusts that the family might own or control.
Some people’s affairs will be reasonably simple and could, largely, be done by very cheaply by a solicitor.
But many Eureka Report readers will also have complex estates. Or should have more complex estates than they are currently planning, to make sure their wealth is passed to the next generation effectively. And estate-planning specialist solicitors in these instances are a necessity.
It starts with the basics of having the death benefit nomination on your super fund or life insurance. Are they being left to the right people? There are often unintended tax consequences of leaving super to the wrong people (that is, non-dependants).
Did you have a couple of relationships during your lifetime? Did some of them involve children? Making sure the right assets go to the right people at the right time is critical.
Do you have, or should you have, provision for a testamentary trust? These vehicles can provide protection for your assets beyond the grave. Again, the bigger the asset base, the more protection that you should plan and pay for.
Retirement sneaks up on you. At one stage, it’s a gazillion years away, then all of a sudden it hits you.
At some point in, roughly, your early 50s, you realise it’s not really that far off. For some, this is the kick in the pants they require to get started on a plan. For others, the call is ignored.
I don’t care what it takes, but if a major birthday milestone – usually 50 or 55 – makes you think even briefly that you need to do something, then don’t kick that can down the road.
The run-up to retirement can add, literally, tens of thousands of dollars to your retirement, while saving you tax along the way as well as years into the future.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.