Summary: A salary sacrifice strategy has the greatest overall benefit for those on the highest marginal tax rate, but even someone on the lowest tax rate benefits from doing this. Although savers have to wait until retirement to benefit, the strategy is flexible and can be stopped in cases of financial hardship.
Key take-out: Over a period of 40 years, the pain of foregoing about three big Mac meals a week allows a saver to earn about an extra $156 a week in retirement.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.
Weighing up salary sacrifice
Is salary sacrifice as extra super worthwhile?
Answer: As the name of the strategy implies, some sacrifice is required for it to work. The sacrifice is forgoing a small amount of pre-tax salary or wages by diverting it into superannuation as a concessional contribution. Because the amount sacrificed is done before tax the drop in disposable income is relatively minor.
The higher the marginal tax rate a person pays the less the reduction in spending power and the greater the overall benefit. Even for someone paying tax at the lowest rate there is a small benefit.
It is important to stress that the earlier this type of strategy is implemented the greater the overall increase in superannuation investments. A weekly salary sacrifice amount of $20, results in a cash flow loss after tax of $17 a week at the lowest tax rate, $14 at the tax rate most people pay, $12 at the second top tax rate, and $11 at the top tax rate.
Over a 40 year period the pain of foregoing this salary comes at the gain of an extra $136,810 in super. To put this into perspective by foregoing about three big Mac meals a week, with the increased amount in superannuation, you will be able to earn about an extra $156 a week in retirement.
The disadvantage of this strategy is that you will have to wait until you reach retirement to get a benefit. An advantage of this strategy is that, depending on what your employer allows, the amount sacrificed can be increased as your earning capacity increases and stopped altogether if you suffer financial hardship.
Going back to work after retirement
I am 66 years of age and retired. I have an SMSF and my fund is currently in pension phase. I have been thinking about going back to work as a casual. I will possibly be working about 40 hours in a period of 30 days and will salary sacrifice my earnings into my SMSF. Will this salary sacrifice of my earnings into my current SMSF cause me to lose the “grandfather” status in terms of Centrelink’s assets test and income test? Would my salary sacrifice be seen as a change to my current status of my SMSF?
Answer: The grandfathering status that you refer to only affects the income test and has no benefit or effect on the assets test. As a result of grandfathering the amount of the account-based pension you receive is reduced by a purchase price that was calculated at the time you commenced your pension. As long as this account-based pension continues to be paid to you the grandfathering also continues.
If you start working casually this will not affect the status of your SMSF if the account-based pension continues, and the amounts salary sacrificed as superannuation contributions are contributed to an accumulation account in your SMSF.
Going back to work should mean that there will be a decrease in the age pension that you receive. The amount of this decrease will depend on the test that currently affects your Centrelink age pension.
If the assets test currently affects you, increasing your superannuation through salary sacrificing will result in an increase in the value of your assets and consequently a decrease in the age pension.
If the income test is used by Centrelink the amount you are earning will be counted as income and result in a decrease in the age pension. Salary sacrificed as extra super contributions are counted by Centrelink as income.
You should seek professional advice to make sure that by going back to work you don’t lose the age pension totally. If this occurs you would need to re-apply for the age pension and therefore the new rules relating to how an account-based pension is counted by Centrelink would apply, thus you would lose the benefits of the grandfathering provisions you currently enjoy.
Passing the assets test
I am trying to find out how much a person can have in assets and earn each fortnight and still receive a full pension. My question concerns a person who has no assets apart from his house, car and contents.
Answer: Currently home owners who are single can have up to $202,000 in assets, and a couple can have up to $286,500, and still receive the full age pension. Non-home owners who are single can have up to $348,500 in assets, and a couple can have $433,000 in assets, and still receive the full age pension.
Single home owners with assets of more than $775,499, and couples with assets of more than $1,151,499, lose their entitlement to the age pension. Single non-home owners with assets of more than $921,999, and couples with more than $1,297,999, lose their entitlement to the age pension.
Under the income test a single person can earn up to $160 a fortnight and still receive the full pension. A couple can earn a combined income of $284 a fortnight and still receive the full age pension. Once income exceeds these thresholds the fortnightly age pension decreases by 50 cents for every excess dollar of income.
Splitting a super pension
My wife and I have a self-managed super fund now in pension phase. I did not give a lot of thought to contributions during the accumulation phase and the fund is now roughly split 35 per cent to my wife and 65 per cent to myself. Is there a procedure to even this up to a 50:50 split? We are both over 65 and do not work for a wage.
Answer: Unfortunately as you are both not working and over the age of 65, short of going back to work to meet the 40 hour work test, there is nothing that you can do to change the balances that you and your wife have in your superannuation fund.
Your situation highlights the importance of people receiving taxation and estate planning advice while they are in their early 60s. A strategy that could have been used before you turned 65 and retired would have been a re-contribution strategy. This would have involved you withdrawing a sizable amount from your superannuation tax free, and then your wife would have re-contributed this as a non-concessional contribution.
This re-contribution strategy can also be used when a large percentage of a member’s superannuation is taxable benefits. In this situation when superannuation passes to non-dependants tax is payable by them at 17 per cent.
The re-contribution strategy to even up the superannuation balances between you and your wife could also have been used to convert taxable superannuation into tax-free superannuation.
Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.
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