Summary: For couples, working together can improve your retirement savings. Possible strategies include building up the super of the older person, turning on a tax-free pension, salary sacrificing for the higher income earner, combining salary sacrifice plans, using the spouse contribution rebate and starting an SMSF.
Key take-out: If one partner feels cautious about these strategies for combining super, it’s worth remembering that superannuation is considered a divisible asset in the case of relationship breakdown anyway.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.
It’s an unusual statistic, though it shouldn’t be overly surprising: Surveys show the widowed are generally the least worried about their retirement.
The reason is understandable. Most of two lifetimes spent saving to fund a joint retirement will now be used to fund only one person’s somewhat lucky longevity. Potentially with a bonus life insurance payout.
Still, it’s not the way people dream of becoming financially “secure”. (Well, not all marriages are perfect, so maybe a few.)
Being a couple is about building lives and families and growing old together. And that means if there is a little less to go around to be with your partner through the golden years, so be it. You’re working as a team.
However, the teamwork can go missing on financial matters. Often, it’s separate earnings, separate savings, even separate investments. Money is the number one cause of marital fighting. So if separate finances keep a marriage together, then all power to it.
But understand there is usually a cost to that. For example, keeping money outside of the home offset account is expensive (it earns interest that is taxed, rather than saving interest, which isn’t taxed).
It’s a similar story with retirement financial planning. Here are six strategies where super teamwork will improve your retirement savings.
1. Building the super fund of the older
If there’s a bit of a gap between the two, then working to build the super of the older person can mean that a bigger pension can be turned on earlier.
This can be done using strategies including spouse super splitting and salary sacrifice. With spouse super splitting, the previous year’s contributions (after the 15% contributions tax) can be shifted from one spouse to another.
And, if on similar incomes, but without the ability for both of you to maximise contributions to the concessional contributions cap ($35,000 for the over 50s and $30,000 for the under 50s), then getting the older member of the couple to make the contributions can work.
Combining these two strategies can supercharge the benefits.
2. Turning on a tax-free pension
Turning on a pension from age 55 can have tax benefits depending on your situation, but the real benefits come at age 60 when super pensions become tax-free income streams.
Consider building up the super of the person turning 60 first, or the person who is already 60, before turning on the pension. It will increase the eventual tax-free pension, which can then potentially be recontributed back as non-concessional contributions, or to aid further salary sacrifice.
3. Salary sacrificing for the higher income earner
If one member of the couple is in a higher marginal tax bracket, then there is more tax to be saved by having that person do the salary sacrificing, if you’re willing and able to make the financial sacrifice.
If the two partners are earning, for example, $130,000 and $60,000, then the higher earner will cut their tax rate on concessional contributions from their 39% marginal tax rate to 15%. The other partner would cut it from 34.5% to 15%.
If a couple has a wider marginal tax rate differential than that – for example, one earns in excess of $180,000 – then the gains can be even better. (Better still if you can both salary sacrifice, but that’s not always possible.)
4. Combining salary sacrifice strategies
Most of the time, you don’t want to go above the $30,000 or $35,000 concessional contribution limits. If one of you has reached that limit, but could easily go above that, then there can be obvious benefits in working together – meaning one paying the other for making tax-effective contributions to allow both people to have higher contributions.
5. Using the spouse contribution rebate
If a spouse isn’t working, or earning a very low income, then that’s no excuse not to build their super balance (particularly if they’re the older member of the couple also).
The spouse contribution offset allows couples to get a tax rebate of up to $540 for a contribution of up to $3000 for those earning less than $10,800. The rebate decreases between $10,800 and $13,800. It’s essentially an 18% rebate within those parameters, as the contribution is made as a non-concessional contribution, after personal income tax has already been paid.
6. Starting a self-managed super fund (SMSF)
Then you’re getting into the ultimate sharing. Combining your super balances into the one super fund allows you to chase superannuation dreams together.
While SMSF members still have individual accounts, with separate dollars in them, combining your super can allow you to achieve things that aren’t possible to do in APRA-regulated funds.
For example, buying investment properties (geared or not) is something that many couples could do together, if they believe in property and believe they can make that work better than their APRA-regulated fund.
But SMSFs are also powerful in many other areas for couples, including being able to use reserve accounts and having better insurance options.
A note on separation
One of the arguments raised against these strategies regards “relationship breakdowns”. One person is cautious because they could lose the money in a separation.
But remember that superannuation has been a divisible asset – along with most other financial assets – when it comes to divorce for about a decade now. What’s in super will be split along the same lines as the rest of the spoils of the relationship.
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.
- The SMSF Professionals’ Association of Australia has backed Federal Government plans for a register of financial advisers. SPAA CEO Andrea Slattery said the register would help consumers identify skilled advisers, including those with specific SMSF knowledge.
- SMSF members are well positioned for a comfortable retirement, according to research from consulting firm Accurium that showed the typical 65-year-old SMSF couple could spend up to $58,128 a year and be highly confident they would not run out of money. But the consultants warned that more than half the couples in this situation don’t have a large enough balance to confidently spend $70,000 a year.
- Wealth management firm AMP’s SMSF assets under administration increased by $572 million to $18.5 billion at the end of the third quarter, compared with the second quarter. The division had 15,491 member accounts under administration, up from 15,173 in the previous quarter.