PUMP UP YOUR SUPER
Many people don’t get around to consistently building up a nest egg. But as they grow older, they realise they are missing out on superannuation’s valuable tax benefits and want to rev up their savings.
Salary sacrifice
The most tax-effective way to bolster your super is through salary sacrifice, because you are putting your pre-tax salary into your super fund. The money is taxed at only 15% instead of your marginal rate.
The maximum annual contribution is $27,500.
For most people, making extra concessional contributions is tax effective if they earn more than $37,000pa.
An advantage of salary sacrificing is that you may be able to slip into a lower tax bracket.
Take the example of Katie, who earns $90,000 before tax, excluding her employer’s super contribution. If she decides to redirect $10,000 of her pay into salary sacrificed super contributions, she will save $3450 in tax, with the extra money going into her fund.
Unused contributions
If you have less than $500,000 in your super, you can carry forward any unused concessional contributions.
You can use caps from up to five previous financial years, including when you were not a member of a super fund.
The amount you can put in depends on the amount you have contributed in previous years.
For example, Jon has only been putting $10,000 into his superannuation fund each year and he wants to boost his savings.
He could contribute a further $17,500 for 2022-23 and 2021-22 and $15,000 for previous years when the contribution cap was lower at $25,000.
Add $330,000 after tax
There’s a limit on how much after-tax money you can put into your super. From July 1, 2021, the annual general non-concessional (after-tax) contributions cap is $110,000. From July 1, 2017 to June 30, 2021 it was $100,000.
If you are under 67 at any time in a financial year, you may be able to make non-concessional contributions of up to three times the annual non-concessional contributions cap in that financial year, so you can contribute $330,000.
The non-concessional contributions are not taxed when they go into your super fund as you have already paid tax at your marginal tax rate. Once the money is in your super fund, investment earnings are taxed at 15%.
Downsizer contribution
If you are over 60 years old, you can contribute up to $300,000 from the proceeds of the sale of your home into your superannuation fund. This can give you more income to spend or help pay off your mortgage.
To qualify, the home must be in Australia and have been owned by you or your spouse for at least 10 years. Selling your home is a big often emotional decision, particularly if you move to a new neighbourhood.
There are instances where people find a smaller home or move to the coast or country but don’t unlock as much money as they expected.
Having a larger super balance or money outside super could impact your eligibility for the age pension, which is subject to income and assets tests.
It is best to get some financial advice before you downsize. “Often the driver isn’t to get more into super, but they don’t want to stay in their home for the long term,” says Chrysalis Lifestyle’s Mark McShane.
Self-employed deduction
The good news is that most self-employed people can claim a full tax deduction for contributions they make to their super up until 75.
There is a limit on how much you can contribute: $27,500 from your pre-tax income and $110,000 from your aftertax income.
The best way to ensure the money goes into super is to set up compulsory savings and pay GST and super first before you access any money.
Work out how much you should be salary sacrificing. Look at how much you want to retire on and use one of the many calculators (moneysmart.gov.au from ASIC or superguru.com.au from ASFA) that will give you different levels of income in retirement.
Calculators ask you how much you have already saved, your salary and when you want to retire.
One way to reach it is to draw down at a higher per fortnight rate from the accountbased pension, say at 6.8% instead of 5%.
If the investment environment is healthy, it might be possible to do so without running down the balance over time.
Another way to add income is by working a few hours in retirement. Part-time work only contributes income towards the age pension income test to the extent it exceeds $300 a fortnight per person under the Work Bonus rules.
The sweet spot assets for a couple will generate deemed income of $7591pa, which is under the income test threshold of $8320pa. That equates to a further $28 per fortnight headroom before the age pension is affected.
Once the deemed income headroom and Work Bonus limits are exceeded, you lose 50 cents from the age pension for every dollar you earn over the limit. It’s a bit like being in the top tax bracket.
The income deficit the couple face to reach ASFA’s comfortable retirement standard ($262 a fortnight) could be met by part-time income without affecting the age pension entitlement.
The couple could actually earn much more in part-time income before affecting their pension.
Taking into account the headroom from the deemed asset income of $28 a fortnight, the husband could earn $328 a fortnight and the wife $300 a fortnight, for $16,328pa of additional income.
Combined with their age pension and accountbased pension drawdown, they would have an aggregate income of $74,287pa, well in excess of the ASFA standard of $64,771.
In the case of a single person, the deemed income from assets is $4564pa, which is under the income test threshold of $4680. The single person is short of the comfortable standard by $7759 ($45,962-$38,203). They could bridge this by drawing down 8% of their superannuation pension account each year, which may not be sustainable in the long term because it will run down the balance unless the investment returns are as high as that drawdown.
A combined approach might be to draw down their superannuation at 6%, adding an extra $2505pa of income, and take on parttime work for $5254 a year. This is within the $300 Work Bonus limit, so there would be no impact on the age pension. Together with the additional drawdown of $2505pa, this would match the single person’s comfortable standard of $45,962.
The FIRE movement (financially independent, retire early), which includes people who retire young and live off their income from their capital, uses a simple formula: work out how much you need to live on and multiply it by 25. FIRE is an international movement not centred on the Australian age pension system.
Bigger mortgages and helping adult kids into the unaffordable property market means that more Australians are retiring with debt.
ASFA says 47% of couple households in 2018 had a mortgage or personal debt nearing retirement. If it were repaid at retirement, around half of couples with debt and twothirds of singles would deplete more than half their balance repaying debt.
Calculate income in retirement
Pre-retirees need to crunch the numbers about their finances and consider what levers they can pull to get a sustainable income in their retirement. It is time to draw down on the assets they have been building up over their working life.
Everyone has a different plan for retirement. “Some still want to work a bit. Others want to travel extensively. Others want to move out of the city. Or help the kids out a bit with
the grandkids,” says Mark McShane, director and financial planner at Chrysalis Lifestyle Planning.
Understanding the tax benefits of superannuation in retirement is often the lightbulb moment, he says. It is one of the few tax concessions that the government gives Australians.
“If you are over the age of 60, you won’t pay tax on any income drawn down from your superannuation or on any of the returns from your superannuation investments,” says McShane.
“People start to look after their investments in superannuation and realise they need to maximise their super.”
You can maximise their tax-deductible contributions to $27,500pa and after-tax contributions to $110,000pa, or $330,000 for three years. (See Pump up your super, on page 35, for other strategies.) Retirees have to adjust to drawing down and living off their assets. “It can be a challenging and stressful time to see the balance go down,” says McShane. ‘It really is a different chapter and can typically take 12 to 18 months – though some never do relax into it and adjust to being with their partner.”
Most Australians draw their retirement income from an account-based pension through their superannuation fund, together with the age pension.
There are longevity products called annuities, but low interest rates over a long period have made them unattractive. (See our retirement feature, on page 44).
Preserve spending power
Retirees with an account-based pension typically take on investment risk to get a reasonable rate of return and invest in local and overseas shares, property, fixed interest, cash and some alternative assets.
“You need some real return above inflation to maintain the spending power of your money and that means you need to take some investment risk,” says Fidelity’s Richard Dinham.
HESTA’s Lisa Samuels says HESTA members “told us they wanted a simple investment strategy in retirement. That’s so they didn’t have to keep changing their investment allocation as markets move.”
“They told us they’d also like their exposure to riskier asset classes like infrastructure and shares to decline as they aged. We designed an investment strategy that takes a long-term approach to reducing risk over time while still being easy to understand and flexible.
“The strategy combines conservative and balanced growth options. Income payments are first drawn from the higher-risk option before switching to the more conservative option.”
Dinham says retirees have had a pretty good run with growth assets for the past 20 or 30 years, driven by declining interest rates.
If the market falls, they typically hold some cash to draw on while the market recovers their losses. He is optimistic about sharemarket performance over the long term, though.
Chrysalis’s Mark McShane says financial advice can give retirees permission and confidence about their finances. “You have plenty in the tank and you’re okay.”
Confident the money will last
Aware Super member Sally (not her real name) decides to retire at 66½ years. She owns her own home and is employed as a teacher’s aide at a high school, working part-time with an income of about $33,000. Sally’s super balance is $430,000.
Sally is single and enjoys her work, but her adult children need help with their children, so she decides to retire to spend more time with her grandchildren.
Sally received full financial advice from Aware to work out her finances, particularly the income to meet her needs in retirement.
She is not a big spender and can live on about $35,000 a year. As Sally’s assets are below the $599,750 maximum assets-test threshold for a single homeowner, she qualifies for a part age pension, which is supplemented by Aware’s account-based pension using her retirement savings balance of $430,000.
Sally will draw down $25,000pa, and receive a further $10,000pa in the age pension.
Aware Super CEO Deanne Stewart says Sally’s drawdown rate is above the minimum 5%. “We were able to show her that she’s well placed to retire now and give her peace of mind and confidence that she’ll have a sustainable income in retirement and long-lasting financial security.”
What’s more, Sally’s drawdown doesn’t eat into the capital of her account-based pension.
When Sally is 84, 18 years down the track, she will have at least the underlying amount of $430,000, plus an additional $80,000 to $100,000 in capital growth.
If Sally chose to live off a higher annual account-based pension amount, she could afford to do so.
In Sally’s case, she held off on spending more because she wanted the confidence and peace of mind that her money is going to last, says Stewart.
Aware Super has changed the investment strategy of its MySuper default option to give superannuation members more money in their retirement years.
It has also updated its lifecycle option with a higher proportion of growth assets.
Aware Super’s Deanne Stewart says this investment strategy could deliver, on average, up to $30,000 more in the value of retirement savings over a member’s working life.
This is due to investing in a high-growth portfolio for the under 55-year-olds, then the growth assets are wound back for the 55- to 64-year-olds before the balanced growth portfolio with less market risk kicks in at 65.
But some retirees are worried about investment risk and move to a conservative option, which will most likely underperform a balanced portfolio over the medium term.
“Some people will eat into their capital rather than take risks with their money,” says Rise Wealth’s Peter Humble.
Retirees must draw down a minimum from their account-based pension.
During the pandemic the rates have been cut in half, but they will rise at the end of the 2022-23 financial year.
While some Australians worry about the future of the age pension, particularly with the high levels of government debt, Andrew Boal from the Actuaries Institute finds it frustrating that the future of the age pension is questioned.
He says the cost of the age pension and superannuation concessions are only 4.5% of GDP and for the next 40 years are estimated to be under 5% of GDP. This is quite low compared with the numbers in some other countries, which spend double what Australia does.
“The cost of our age pension is very affordable and sustainable,” he says.
In fact, it is the taper rate that keeps the age pension affordable.
In contrast, aged care and healthcare costs are set to rise over the next 40 years.
Some retirees undervalue assets such as their car and caravan to access the age pension, but financial planner Mark McShane recommends always using true valuations. If you value your contents at $10,000 and your car at $10,000, the government tends not to check up.