iAdvice Financial Services | Maximise contributions for a comfortable retirement
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Maximise contributions for a comfortable retirement

Maximise contributions for a comfortable retirement

There is nothing quite like a deadline to turn good intentions into strategic actions. So it is important not to let the financial year pass without giving some thought to a number of tax-effective super strategies, while, at the same time, taking the opportunity to consider how to prepare for the new financial year.

Choosing to maximise concessional (pre-tax) contributions to super can be a good way to boost retirement savings and also reduce the potential tax on take-home ­income.

Generally, employees are currently entitled to receive 9.5 per cent of their salary as superannuation guarantee (SG) contributions, which are considered concessional contributions. While this provides a source of retirement savings, it may be appropriate to consider whether relying on this alone will be enough to fully sustain an individual’s lifestyle in retirement. Furthermore, individuals who are self-employed may not be making any contributions to super unless they consciously make the decision to do so themselves. As such, it may be prudent for people to consider whether extra contributions to super could help to grow their retirement ­savings.

There are limits (known as caps) to the amount an individual can contribute each year to super on a concessionally taxed basis (15 per cent rather than their marginal tax rate), and if this level is exceeded additional tax may be payable. With a current concessional contribution cap of $25,000 per annum, there may be scope to make additional contributions on top of the 9.5 per cent SG.

To illustrate this, take for example Mark, 55, who is 10 years away from retirement and is looking to boost his retirement savings and access potential tax benefits. Mark’s employer currently contributes $10,500 to super on his ­behalf.

Mark chooses to enter into a salary-sacrifice agreement with his employer to contribute an additional $14,500 of his pre-tax salary to super, which takes his concessional contributions for the year to the maximum $25,000.

This strategy would reduce the rate of tax Mark pays on the $14,500 from his effective marginal tax rate to just 15 per cent when the contribution reaches his super fund. It would also reduce the personal income tax Mark would pay, as his pre-tax salary has been reduced by $14,500. Importantly, while there may be an immediate tax benefit for Mark, he generally will not be able to access them until he meets a condition of release (for example, when he reaches his preservation age and stops working full time, or upon turning 65).

If Mark were self-employed or his employer didn’t offer him the ability to salary-sacrifice, another way he could make the most of his concessional contributions cap would be by making a personal contribution to his super, and after following the correct process, claiming a tax deduction for the contribution in his income tax return.

Are there other reasons to consider making the most of concessional contributions aside from potentially reducing an individual’s tax and boosting their retirement savings?

There are a number of potential options to consider.

Firstly, through contributions splitting, an individual may split some of their concessional contributions made during the income year to their spouse’s super to top it up.

Any extra contributions made can also help fund premiums on insurance policies that may be held within super. Plus, the eligibility criteria to make concessional contributions isn’t restricted by an individual’s total super balance, unlike non-concessional (after-tax) contributions.

It’s not only the contribution side of super where tax effective strategies can be found. When and how people choose to access super can have an impact on their individual tax position and the tax paid on the investments held within the fund.

For example, TTR strategies can be used to support the transition from full-time work into retirement where an individual may look to reduce their hours of work and supplement their income with TTR pension payments, or when an individual is looking to maintain their hours of work and boost their super savings through a salary sacrifice arrangement, as mentioned previously. However, when considering these strategies, it is important to note that since July last year, investment earnings supporting transition to retirement (TTR) pensions are no longer tax-free but taxed at 15 per cent.

While there are still benefits for those under age 60, TTR strategies may work better for individuals aged 60 and over and particularly if they are a middle to upper income earner. Personal circumstances will determine whether a TTR strategy is the right choice.

Once a person is fully retired, switching their TTR pension or accumulated super saving to a full account-based pension will bring further benefits. All investment returns from assets supporting their retirement-phase pension will be tax-free up to the transfer balance cap limit of $1.6 million. In addition, any lump sum or pension payments taken from super after an individual turns 60 are also tax-free.

As people approach post-retirement, other optimisation strategies are worth considering.

For example, if eligible to withdraw and make a contribution into super, a recontribution strategy, which involves withdrawal of some or all super benefits and then recontributing an amount back into super, may be beneficial.

While this strategy may not change the tax treatment of benefits received from a super fund, it can reduce the tax adult children pay on super benefits they receive as a result of their parent’s death.

In certain circumstances a recontribution strategy could also be used to help equalise balances between spouses. It may be beneficial to do this so both benefit as much as possible under the transfer balance cap limit of $1.6 million.

Making the right decisions about contributions and accessing benefits can be complex, so seeking professional advice is something to consider. Professional advice can help maximise the opportunities, but also help to avoid the potential pitfalls which come with looking to optimise super and retirement outcomes.

Source : 08-06-2018


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