Super - maximising wealth for retirement
Superannuation (super) is a compulsory, tax-effective savings method to fund your retirement.
Super is like any other form of investment, but with special rules relating to taxation and when you can access the funds. Each person has individual objectives and circumstances, but ultimately the aim is to maximise wealth in retirement.
The Government recognised several years ago that as our population was ageing, more people would have to self-fund their retirement (and rely less on Government support such as the Age Pension). The Government subsequently introduced the Superannuation Guarantee (SG), the compulsory contribution of super by an employer for their employees. The SG is now nine per cent of an employee's earnings base.
Read on to find out more about super and how you can make it work for you.
- Get more out of your super
- Women and super
- Super and divorce
Get more out of your super
Super is structured so that your super investment benefits from reduced rates of tax compared with other investments over time.
Salary sacrificing: increase your super power
Salary sacrifice refers to an arrangement between an employer and employee, where the employee forgoes a component of their salary in return for an equivalent benefit.
Many employers allow you to 'salary sacrifice' into super. Investing in super by salary sacrifice, using 'before tax' or 'pre-tax' dollars, means that instead of your income being taxed at your personal marginal tax rates, such contributions are taxed in the superannuation fund at a rate of up to 15 per cent.
You may have an opportunity to salary sacrifice a bonus payment to which you have no pre-existing entitlement. In other words, as long as an agreement to salary sacrifice is in place before your employer determines your bonus, the arrangement will be effective for tax purposes.
Let's assume there is an agreement with your employer, which allows you to salary sacrifice a prospective bonus into your super fund. Here's how this could work to give you a tax benefit. Andrew, aged 46, earns $65,000 and is anticipating a $10,000 cash bonus, which his employer allows him to salary sacrifice. The tax benefit is detailed below:
| |
Bonus as salary sacrifice |
Bonus as cash salary |
Pre-tax bonus |
$10,000 |
$10,000 |
Less: 43.5% income tax plus Medicare Levy |
N/A |
$4,350 |
Less: 15% Contributions tax |
$1,500 |
N/A |
Net amount to invest |
$8,500 |
$5,650 |
The advantages of salary sacrifice contributions are generally greater for those on higher incomes, as the potential tax saving increases at higher marginal tax rates.
But remember, there is a dollar limit on the amount of 'before-tax' contributions you can make each year depending on your age.
Spouse contributions
You could also consider making additional super contributions on behalf of a low income or non-working spouse. If your spouse's income (including reportable fringe benefits) is $10,800 or less per annum, you may also be eligible for a tax offset of 18 per cent on up to $3,000 of eligible spouse contributions (reducing to zero where your spouse's income is $13,800 or more per annum).
Things to do to help maximise your super's earning power
- Make additional voluntary contributions
- Consider investing your super for growth
- Consolidate your super in a single account
Important note: Before you make any decision you should talk to your financial adviser to make sure your super investment fits with your total financial plan and to receive taxation advice specific to your circumstances.
Women and super
Saving for retirement is becoming an essential part of life for everyone, but in particular for women. There are two main factors that make saving for retirement a priority for women:
- Australian women are living longer
The current average life span is approximately 82 years for women and 78 years for men1 - and life spans are increasing! In this context, it is important that a woman's financial independence is established during her working career, in order to enjoy a comfortable retirement.
It is generally considered that the current Superannuation Guarantee (SG) rate of nine per cent of earning base is not enough to fund the retirement of one person, let alone a couple. Yet there is often a gap between a couple's expectations for their finances in retirement and the reality.
- Super savings are generally smaller for women
Although some women never marry, and more and more men are taking on childcare responsibilities, it is generally the case that women have a 'fractured' working life due to family commitments. On average, women are currently in the workforce for 20 years in full-time employment, compared to 38 years for men2. As the SG is based on a percentage of salary, the super accrued by women will generally be less.
As you can see, saving for retirement should be a priority for women. Speak to your financial adviser to find out how you can work toward increasing your super and securing your financial future.
1 Dr Diane Olsberg and Shauna Ferris, The University of NSW Research Centre on Ageing and Retirement, 'Ms…ing Out? Women and Retirement Savings', 7 September 2001, Economic Policy Summit: Sydney, Australia, pg. 7.
2 As above, pg. 13
Super and divorce
If a couple divorce or separate, super can be valued and split as decided either by the couple (a Superannuation Agreement) or by a court (a Splitting Order).
As super is often one of the largest assets of a relationship, sometimes second only to the family home, it is important to be aware of how super is treated after the breakdown of a marriage.
Under the system, a non-member spouse can request details of their partners super. The non-member spouse must complete an application for information about a superannuation interest and a Form 6 - Declaration to accompany application to the trustee for information about a superannuation interest. This information may be used to negotiate a Superannuation Agreement or to prepare a Superannuation Court Order.
Additionally, the new law only affects couples in common law marriages. De facto and same-sex couples are not covered under the Family Law Act.
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