On April 29, the Senate released the “A husband is not a retirement plan” report off the back of its inquiry into the economic outcomes of Australian women in retirement. It made 19 recommendations aimed at leveling the playing field Australia’s superannuation sector, finding that the average super balances of Australian men and women differed by more than 50 per cent at retirement age.
It’s not just women that can be disadvantaged in Australia’s super system – as Eureka pointed out last year, any kind of career break, including changing jobs, returning to study, having children, or experiencing a period of unemployment can all affect your super balance in the long run.
Though the key ‘reforms’ announced on Budget night by Treasurer Scott Morrison are currently causing consternation in finance circles, the budget did deliver three key changes that aim to assist those who need to top up their super balances: These changes are available to those with super balances less than $500,000 (for concessional cap rollovers), though industry statistics suggests more often than not they are most relevant to working women.
1. From July 1, 2017, individuals will be able to roll over concessional contributions if their super balances are under $500,000 – this means that if you do not use the entire $25,000 limit in a year, this can be “used later” on a five year rolling basis to catch up on contributions.
2. There is the Low Income Super Tax Offset provision, which will allow a tax offset on concessional contributions, capped at $500, for those who earn less than $37,000 in a calendar year (also from July 1, 2017).
3. There is also a Low Income Spouse measure that will provide up to a $540 per annum tax offset for contributing to a spouse’s account if they earn less than $37,000.
Superannuation bodies and those campaigning to close the final gap in super balances see these changes as an important first step - “It’s such a relief that Government and opposition support greater tax equity for low income earners,” says national chair of Women in Super, Cate Wood – but these measures require planning if you want to take advantage of them.
Here are three things to consider when making the most out of the new landscape:
Use the flexibility provided for final top ups
One more major change flagged in the budget could give savers the opportunity to play catch up in their later years, with the removal of the work test for those aged 65-74 to make concessional contributions. This means more individuals will be able to make top up payments after they have taken care of other major financial commitments, like raising children and paying off mortgages, have been met.
“It might seem like finding the money for top up contributions is a lot,” says Volpato, “but this change gives flexibility – it might well be that that this point in life someone has had a windfall or come into funds from property or another source.”
The superannuation system works on a number of key assumptions, namely stable and consistent employment. One point made consistently in the Senate inquiry is that the superannuation gap is not an issue of the past – and it opens up early in working life. Many Eureka subscribers might be entering retirement, but for those closer to the beginning of their working life – including adult children just entering the workforce – it’s worth knowing that on average, women aged 20-24 have about a 20 per cent lower super balance than their male counterparts. This opens up to a 32.1 per cent gap for the 35-39 age group, and a 56.5 per cent gap for those aged 75-29.
This makes planning ahead and considering one’s desired super balance at retirement all the more important while you are still decades away from drawing on it.
“In the early stages of retirement saving, every little bit helps,” says Karen Volpato, Senior Policy Officer at the Australian Institute of Superannuation Trustees. “Even having a little bit added each year [as these new provisions allow] is a big help for final super balances,” noting that the Low Income Tax Offset and spouse offsets can add a little extra each year to bridge the gap during career breaks later – provided you jump on them as soon as possible.
Given that super is an investment that relies on time and compounding, the earlier these new measures are acted upon, and the more amplified the results.
Know the true cost of a career break
The rollover rule for concessional contributions will assist those who have taken time out of work to top up later without losing the tax concession that other workers enjoy.
However, as Scott Francis highlighted in Eureka Report last year, having a break in career, for whatever reason, has multiple effects on your final balance: your employer is not contributing the same, or any, guaranteed super contribution in the first place, the career break might slow the rate at which your wage would naturally increase over time, and those lost contributions will have an effect on the compound growth rate of the super fund in the long term.
As Francis wrote last year, a 30 year old who takes a two year career break needs to make 2.5 years of double the superannuation contributions in order to catch up.
Knowing the cost of a career break and what needs to be added to make up the difference will help make the most of the concessional contribution rollover change. You can get a fair idea of the impact of career breaks with a tool like ASIC’s career break super calculator, or getting a financial adviser to work through this with you.
“People think about these things and know what their super balances are when they return to work, but the question is often whether they have enough saved to actually make the additional contributions, so that’s something to consider early,” says Volpato.
The Senate report flagged three pillars of Australia’s retirement savings system: an individual’s super account, savings and assets held outside of super, and the Age Pension – arguing that nobody can rely on one of these alone, and instead should plan ahead for each. As our expert team discussed in last week’s budget special, getting the balance of these assets right is important – a financial adviser can help review individual circumstances to make the most of all proposed changes.