Use your super powers to be a retirement hero
of Australia’s superannuation rules are just silly.
Our governments want us to fund our own retirement — so they don’t have to pay pensions — yet they continue to create wacky laws.
These laws stop us from boosting nest eggs, punish us if we’ve been too successful at making money, and sometimes put the brakes on before we even get started.
Despite the hurdles, super remains the best place to save for the future because of its low 15 per cent tax rate during your working years, and zero per cent tax when you retire.
All you have to do is get your head around the stupid super rules, and plan a little more. People can pump extra money into super before income tax gets taken out. This extra deposit — called a concessional contribution and often done via salary sacrifice — only gets taxed at 15 per cent rather than the marginal income tax rate of up to 47 per cent.
However, the Government has a cap, and this year it lowered the cap from $35,000 to $25,000. That still might seem like a lot of money, but many people only have the financial firepower to pump extra cash into super later in life once their mortgage and children are gone, so they may run out of time.
The $25,000 cap also counts compulsory employer contributions of 9.5 per cent of work- ers’ wages, which takes up almost one-third of the cap for an average wage earner.
The best way to combat this is to start pumping extra money into super earlier in life, if you can. There’s a way to get larger amounts of money into super, but that’s been cut back too.
Non-concessional contributions are money you pay into super after it’s already been taxed — perhaps from selling an investment, or just having a lazy $100,000 of unspent wages sitting in a savings account.
This cap used to be $180,000 a year, but on July 1 it was cut back to $100,000.
The good news is there’s a bring-forward rule that allows you to make three years of contributions in one year. And that’s per person, so if a couple sells an investment property they could each inject $300,000 into super. Get the timing right and they could deposit $400,000 each within a week. Super works best when allowed to grow over many decades, yet our current rules mean the youngest workers — who can benefit the most — don’t always get it.
Employers don’t have to pay their workers super if they earn less than $450 a month, so students, part-timers and young people holding down several different jobs often miss out.
While lobbying continues to get the rules changed, in the meantime people should consider the co-contribution scheme, where the Government pays up to $500 a year into the funds of low-income earners if they — or their parents or grandparents — pay in $1000 of their own money. That’s about $19 a week for a 50 per cent boost.