Super-charge your savings

For over 49s, superannuation should be the first place to place any retrenchment or inheritance lump sums.

Summary: With the government lifting the non-concessional contribution rate to $180,000 for over 49s, the government is clearly indicating superannuation is a good way to save. And rising caps should allow investors to save a lot in a relatively short period.
Key take-out: Contribution caps on superannuation are rising making super funds an even better location for your lump sums.
Key Beneficiaries: General investors. Category: Superannuation and SMSF strategies.

This article is not for everyone. If you are a younger executive or entrepreneur building up your business and/or paying off your home mortgage then my strategies regarding superannuation do not apply to you.

But there is a large number of  people, usually old (but not always), who suddenly get retrenchment or retirement lump sum or an inheritance and their first inclination is to hold that money either in their own account or the account of their spouse.

This week the government increased the amount of money you can save via superannuation and I think that for a large number of those people,  superannuation is a far better way of saving than using your own personal account.  I realise trusts are an alternative that will suit many but, perhaps irrationally I am wary of trusts  because too many people I know have had bad experiences.  And personally, I have had a wonderful experience with superannuation.

In the current year, people aged over 49 (but under 59) can contribute $175,000 into superannuation including $25,000 that is tax deductible.*  And from July 1, the government has lifted the amount people in this age bracket can pay into superannuation annually to $215,000, again with a $35,000 tax deductible.

Accordingly, in a relative short period of time it is possible to save large amounts via superannuation.  Indeed if you are aged over 49 but under 65 from July 1 2014 you can invest in superannuation three years at a time in other words you can invest $540,000 ($180,00 by three) plus an annual tax deductible contribution of $35,000.  Once you are over 65 superannuation has to be contributed annually and contributions cut out when you reach 75. 

For people aged over 65 there is a work test but it is not a very onerous work test.  All you have to do is work 40 hours in any 30 day period.  There is not a lot of detail as to what constitutes work and it includes the term “gainfully employed”.  My guess is that it would include babysitting and a range of other activities.  You have to be properly rewarded for those hours but there is no particular stipulation on rates.  For practical purposes  the vast majority of people can contribute to superannuation up to aged 75 - if that is what they want to do.

For my own part I have worked beyond 65, which was never in my retirement plan, so I have taken advantage of the ability to contribute to superannuation with after-tax dollars – in technical terms those contributions are called “non-concessional contributions”.  Once you are aged over 60 you can put your superannuation into pension mode although it means you must  pay a pension out every year. (4% of the assets of the fund between 60 and 65 and 5%* between 65 and 74. For the next five years to aged 80 it is 6%) .

But those pension payments are tax-free and even though you are paying a pension you can continue to contribute to the fund. That does involve a few accounting gymnastics  and you virtually set up separate funds within the one fund, but it is not a hard thing to do. 

So you have a vehicle where the income on your savings is tax free and the money your fund is paying out in pension you  can re-invest back. Most people are nervous about superannuation because they are frightened that the government will impose new taxes on it. 

No superannuation changes this term

The current government has said that there will be no substantial superannuation changes in their first term in office.  That does not prevent them making changes in their second term.  My guess is that if Labor wins in 2016 or Abbott has a second term in office there is a risk that there will be some sort of tax on pension superannuation particularly if income rises above $200,000, but the tax will not rise above 15 per cent. That is still better than personal rates on taxation. And there is no certainty such changes will happen because taxing people’s retirement is a very dangerous political exercise and Treasury still doesn’t understand how you calculate the costs of superannuation contribution which means government can’t rely on treasury advice. 

I obviously hope that the superannuation pensions will remain tax-free but if a portion of the income is taxed at 15 per cent I will not be jumping off a cliff.  For most older people investing in high mortgage houses is probably not the best strategy to adopt. But under current superannuation rules, if that is what you want  to do, then  you can have your superannuation fund invest in a house and mortgage  it. So while there are some limits to your flexibility in terms of drawing money out of superannuation, for the most part is there is no cap on amounts of superannuation pension that can be withdrawn each year.  In other words for people  aged over 60, money in superannuation  is very flexible. Again it is possible that will change but the low tax rate remains very attractive .

That is why I think if you have large amounts of accumulated savings in your personal account, I think it is worth seriously considering investing that money in a self-managed superannuation fund.  As to what you do with the money when it is in the fund, that is a separate question but really most of the options that are available to you in your own personal account are available in superannuation - including bumping up the pension to take a holiday.  The only real difference is that the tax rate is currently nil if the fund is in pension mode. 

So by lifting the non-concessional contribution rate to $ 180,000 the government is giving you a clear indication that this could be a good way of saving.  And those Eureka readers that have substantial funds in their own personal account should seriously consider accepting the government’s invitation.

* An earlier version of this story reported that in the current financial year people aged over 49 can contribute $185,000 into super, this figure was incorrect: The correct figure is $175,000.  

*An earlier version of this story incorrectly reported the minimum annual payments you must pay is 7% between 65 and 74. The correct figure is 5%, according to ATO.