Have you been doing the numbers and panicking a little recently?
If your super fund is a little ‘light’ as you start to think ahead to your golden years, you’re not alone.
Millions of Australians are reviewing their retirement plans. We have been taught to believe that the money that flows into our super fund (equivalent to 9.5 per cent of our salaries) will look after us when we retire.
But many Australians are finding out that the numbers simply aren’t adding up. We’re living longer; many of us have more lavish lifestyles and higher expectations; the cost of healthcare and utilities is rising dramatically; and suddenly those golden years aren’t looking so shiny.
The superannuation guarantee (SG) is scheduled to climb in increments until July 2025 (more about this below) – but this is unlikely to be enough to cover the shortfall.
The Association of Super Funds of Australia currently estimates that around $545,000 is required as a healthy average balance to retire on. This figure would be more if you need to pay rent.
Unless you are supplementing your super employer contributions with money from other sources, it is likely that you’re in a similar boat to over half of Australians, who will be struggling to meet this requirement.
That spells trouble in your later years.
So it’s important to consider ways of fattening up your fund in your remaining working years so that it’s better positioned to look after you and your loved ones.
How can you do that?
You’re probably familiar with a few of the ways that you can swell your fund – but there may be a few you haven’t considered…
Note that the following information is of a general nature and should not be considered to be advice specific to your situation. You should always consult a qualified financial advisor when making changes to your superannuation contributions or structure.
Get the obvious one out of the way.
If you are an employee over the age of 18 earning more than $450 per month, your employer must pay the equivalent of 9.5 percent of your ‘ordinary time earnings’ into your super fund.
These compulsory contributions are called Superannuation Guarantee contributions and they will gradually rise to 12 percent by July 2025.
These earnings include:
- Over-award payments
- Some paid leave
For every $10,000 that you earn, it equates to $950 into super. Your employer must pay this in once a quarter at least – most will pay more often than that.
As a contractor, if you’re paid mainly (or wholly) by the hour, your employer is still obliged to pay the 9.5 percent into your super.
There is not much you can do with this in terms of topping up your super – other than working longer hours, getting a second job, or pushing for a salary increase.
The equation is quite simple: the more you get paid the more goes into your super!
Salary sacrificing/Personal concessional contributions
By voluntarily electing to pay a larger proportion of your salary into your super fund, you can boost it AND receive tax benefits.
This is called ‘salary sacrificing’ and it is a practice that is looked upon favourably by the Australian government.
It needs to be arranged through your employer so that the amount is automatically deducted from your salary.
Also effective from 1st July 2017 the government removed the 10% test on personal concessional contributions. The removal of the 10% test now allows people on wages to claim a personal tax deduction for super contributions placed into the fund outside their employer. Please note a notice of intent to claim form has to be completed properly to be allowed to claim a personal tax deduction. This form of contribution also gives the ability of self-employed members to contribute into super & claim a personal deduction.
Anything you pay into your super fund under this method is calculated before income tax and after only the 15 per cent super contributions tax. Under current legislation the annual concessional limit for the 2018 financial & onwards is $25,000 per person regardless of age.
For individuals other than low income earners, this means that you get to keep far more of your money from the taxman!
Spouse super contributions
Does your spouse or partner work part-time? Do they earn a relatively low salary? Are they out of work or a stay-at-home parent?
If so, it might be beneficial for you both if you contribute to their superannuation fund.
For professionals whose spouse or partner has a super fund that is not growing at all or very little, this can create problems in retirement.
One way to address this is to contribute some of your own money to their fund and thereby claim tax offsets.
While the regulations on this do change, the tax benefits are accessible to couples who are both Australian residents and you are:
- Able to make an after-tax contribution to your spouse’s super account (who is under 65 and receives under a certain income – check the latest limits here)
- Married or in a de facto relationship where you are living together
Personal tax-free contributions
Another tax-friendly way to boost your super fund is to make ‘non-concessional contributions’.
These are lump sums paid into your super account. They are tax-free because they are considered to be savings from income that you have already paid tax on. It is different to salary sacrificing, which covers contributions made before tax.
Just arrange with your super fund to pay in. It can be on an ad hoc basis and can usually be arranged directly through your bank account (by BPay or cheque).
Again, non-concessional contribution limits do change, so check the latest guidelines on the ATO website.
The co-contribution scheme is an excellent way to boost your fund if you’re considered a low or middle-income earner.
Making an extra (after-tax) contribution to your fund triggers a tax-free contribution from the Australian government. This is paid automatically after lodgement of your tax return, if you have provided your Tax File Number to your super fund.
This can be especially effective for low-income earners who start early and contribute over many years to accumulate the extra benefits.
The amounts and limits of these contributions change over time but check the ATO’s superannuation pages for the latest regulations and eligibility guidelines.
Rollover and save
At present, there are almost three superannuation accounts per Australian of working age. Clearly, many Australians have more than one super fund.
It’s quite easy to forget about your super and let it tick over, not doing much.
Get proactive with it. Understand the super funds you have and analyse the investment returns and the fees you pay (admin fees, investment fees, life insurance premiums etc.)
You may find that you will both save AND make money by rolling over into one solidly performing super fund.
Simply getting smarter with your funds can help you grow what you have quicker.
Please note it is always important to do an insurance review prior to consolidating your superannuation funds.
Downsize and divert money into super
One strategy that might work for you if the numbers aren’t adding up quite how you’d like is to downsize and start channelling money into your super fund.
This may be a good option if you are already over 65 or if you have a home that is currently under-utilised: perhaps your children have moved out or other circumstances changed?
Downsizing to a smaller home may have tax benefits and/or release lump sums that can be used for contributions into your super.
Grow your super – starting today!
If you’ve read this far, it’s likely that you’re concerned about your super fund going the distance to look after your loved ones in later life.
After all, you might live into your 90s or beyond 100!
Don’t panic. It’s a positive sign that you want to do something about it.
Super gets preferential tax treatment and it just takes a little planning, juggling of priorities and action to start channeling money into your fund and growing it.
The immediate peace of mind you will experience from the knowledge that you are securing your future will be just as valuable as the financial benefits you’ll receive later in life.
Assess the current status of your fund(s); understand if there is a shortfall between where you are now and where you should be for the lifestyle you are planning; and then start doing what needs to be done to grow what you have, considering the methods outlined above.
If you need assistance with growing your super fund, feel free to contact one of our dedicated team of SMSF Accountants for professional advice.