|Summary: The ability to split superannuation contributions with a spouse can be highly beneficial, not just for the reason of building up the super balance of a spouse on a lower income. There are also advantages from being able to gain early access to the super of the spouse who reaches pension age first.|
|Key take-out: With plans by the government to lift the pension age to 70, and with many retirees unlikely to gain much if any benefit from the age pension, having access to the superannuation funds of the oldest spouse when they reach either transition to retirement age or full retirement is highly beneficial. The earlier this is planned into one’s retirement strategy the better.|
|Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.|
Superannuation contributions splitting is a personal finance strategy that couples can take advantage of to move superannuation balances between their accounts.
But there is an element of crystal ball gazing involved in working out which member of a couple should be splitting their contributions, and what the goal is in splitting the contributions.
Recent federal budget changes to the retirement age and the age pension – although not yet approved – highlight this. These proposed changes might lead to a higher proportion of people using a contributions splitting strategy that splits contributions to the older member of a couple so that superannuation assets can be accessed earlier to fund retirement, rather than relying on the age pension.
What is contributions splitting?
It is worth starting with the basics of what superannuation contributions splitting is, and whether you can access it. At present you can split 85% of the value of any employer contributions made for you (including salary sacrifice contributions) and personal contributions that you have claimed a tax deduction for (usually make by self-employed people). The 85% that you can split allows for the 15% tax on these contributions. For example, if you have $10,000 of employer contributions in a year the after-tax value of these contributions will be $8,500, and you can split this value to your spouse.
You are generally only allowed to split contributions made in the previous financial year. So, if you thought there was some value in a contributions splitting strategy, at the moment you could still split contributions made for 2012-13 financial year. Your superannuation fund (or self-managed superannuation trust deed) has to allow contributions splitting, and you need to be aware of any fees that might be charged. Further details on superannuation contributions splitting rules are available from the Australian Tax Office by clicking here.
There are a number of reasons why a couple might split their contributions. For example, contributions might be split to a non-working member of a couple so that their superannuation fund can continue to pay the premiums on a life insurance policy. As I implied at the beginning of this article, deciding on whether a contributions splitting strategy is right for you is not an exact science – it involves an element of forecasting into the future. For example, if you thought that a legislative change in the future might see superannuation income streams being taxed as income, or that high superannuation fund balances might attract a tax penalty of some sort, then you might be inclined to split superannuation contributions so that both members of a couple had relatively equal balances.
The federal budget changes that might influence the way people think about superannuation contributions splitting include:
- For people currently in their early or mid-careers, 2035 sees the age pension qualification age rise to 70. This will affect people aged in their late 40s now.
- The budget reduces the attractiveness of the age pension over time as it increases by the rate of inflation, rather than the rate at which wages increase.
- The age pension will become harder to qualify for as income and asset tests thresholds are frozen for three years.
As well as these changes, the Audit Commission recommended that the age of superannuation access be linked to the age pension age – and be set at five years earlier than the age of entitlement to the age pension. For those people who will be retiring when the age pension entitlement limit reaches 70, that means they won’t be able to access their superannuation until age 65 if that legislation is approved.
All of these changes suggest to me that a number of people who are currently in their 30s, 40s and early 50s will be thinking that there is going to be a clear benefit in planning a retirement independently of relying on the age pension. Being in my late 30s I am certainly thinking this way. I would like to retire before the age of 70 and realise, more than ever, that funding my own retirement without planning to retire on the age pension is going to be the best way to retire on my terms as far as both retirement age and quality of life are concerned.
For people thinking along similar lines, and perhaps being influenced by this year’s budget, splitting superannuation assets towards the older member of a couple is a strategy worth considering. The older member of a couple will have earlier access to their superannuation assets, so having these assets in their name will allow a couple to access to them earlier.
It also fits in with another strong pre-retirement strategy currently available – the “transition to retirement” (TTR) income stream. With all superannuation withdrawals currently tax-free after the age of 60, a strategy that sees a person withdraw tax-free income from their superannuation fund in the form of a TTR income stream while maximising their salary sacrifice contributions to superannuation is a great way to save tax and build assets in the lead-up to retirement. And having more superannuation assets in the name of the older member of a couple may allow that strategy to be more effective earlier.
The complexity around contributions splitting is that we are trying to work out a strategy that is implemented now to take advantage of a tax and retirement environment that might be 20, 30 or even 40 years in the future.
In doing that, it is worth keeping in mind that we can hedge our bets on this strategy – we don’t have to split all of our contributions in a year. For those people who see the recent budget decisions (which could reduce the attractiveness of the age pension) as a sign that they should plan to retire on their terms, independent of the age pension, then a strategy that sees some superannuation assets moved to the older member of a couple is worth further consideration.
Scott Francis is a personal finance commentator, and previously worked as an independent financial advisor. The comments published are not financial product recommendations and may not represent the views of Eureka Report. To the extent that it contains general advice it has been prepared without taking into account your objectives, financial situation or needs. Before acting on it you should consider its appropriateness, having regard to your objectives, financial situation and needs.