Bruce Brammall, 18 September, 2019, Eureka Report
SUMMARY: Partners in life and partners in super, Part II. Two more strategies for better super balances and bigger government pensions.
Sometimes by giving a little ground in a relationship, you can both come out bigger overall winners.
That doesn’t seem to be working too well for Boris Johnson and the British Parliament on Brexit at the moment. But the theory generally holds up.
It certainly does for superannuation. And for couples who are prepared to give a little to work together with their retirement savings, there are many examples of where one plus one can be made to add up to more than two.
Today, I’ve got two further strategies to assist couples to work collaboratively to build their super. One will grow your joint super faster, with some tax savings. And the other will help many get more government aged pension.
In a recent article, I went through two big-ticket strategies for how couples should work together to enormous effect for their super. These strategies were designed to maximise the super balances of both members of a couple, particularly with regard to the $1.6 million transfer balance cap (TBC). They were aimed at couples with higher balances and/or higher incomes.
The strategies included using spouse contribution splitting and working together on areas such as salary sacrifice. And they can and potentially should be used by far more people than are currently using them.
But there are things that many other couples could do, even those with relatively modest super balances, to help them build their super bigger and stronger.
Here are a further two.
- Withdrawal and recontribution to maximise pensions
A withdrawal and recontribution strategy involves pulling money out of super and then recontributing it. This is most usually withdrawn and recontributed to the same person’s account and is done to reduce the taxable portion of the superannuation balance, because the contributions go back in as non-concessional contributions.
However, this can be particularly effective where there is an age gap between the couple of at least a year and the older one is approaching age pension age and intends to apply for the pension.
Eligibility for the government age pension is determined by two tests – the assets and incomes tests. Once you turn age pension age (which was once 65, is now 66 and is on its way to 67), your superannuation becomes an “assessable asset” for those two tests, even if you’re not drawing a pension from it.
Those two tests are too complex to explain today (some would argue any day).
Essentially, couples financial assets are counted when they apply for the government age pension. This includes shares, personal assets and investments. Importantly, it includes the superannuation of the person seeking to claim a government benefit (not the value of the home).
But not the superannuation value of their partner, if they’re not of age pension age.
Let’s take Bill, 66, and Julie, 61. Bill is applying for the age pension. Julie won’t be able to receive the age pension until she’s 67, because she was born after the 1st of January, 1957.
If Bill is able to withdraw some of his superannuation and give it to Julie to put into her superannuation … it goes from being an asset that is assessable (super in his name because he’s of age pension age) to a non-assessable asset (super in Julie’s name, because she’s under age pension age.
For example, Bill has $600,000 in super and Julie has $500,000 in super. Aside from that, and their home, they have few other assets.
Bill takes out $300,000 from his super and Julie makes a non-concessional contribution (NCC) into her super fund. This has reduced Bill’s super to $300,000 and increased Julie’s to $800,000.
Julie’s $800,000 in super does not count as a financial asset until she is of age pension age.
This should allow Bill to pick up a larger, even full, age pension.
Note: This strategy is complex and today’s explanation is simplistic. It requires particular consideration of eligibility to make the recontribution. Always consult a financial adviser before considering this strategy.
In the case of Bill and Julie, this could potentially deliver tens of thousands of dollars in pension benefits over that five-year period.
2. Spouse contributions
Yes, you can contribute to your spouse’s superannuation account. If you run a household where everything is jointly owned, then it’s really coming out of joint money anyway.
But if you do it the right way, there are tax benefits.
“Spouse contributions” rules were designed to allow higher earning spouses to make contributions to lower-earning spouses. This might be because they earn less, or because they’re taking extended leave.
Essentially, a higher-earning spouse contributes up to $3000 into the super account of a lower-earning spouse and then qualifies for a tax rebate of up to $540.
Originally, qualification required the spouse receiving the contribution to be earning less than $10,800, fading out by the time they earned $13,800. This has now been lifted to $37,000, fading out by $40,000.
The amount counts as a non-concessional contribution (NCC), so could form part of a contribution of up to $100,000 for a given financial year. But you will only receive the tax rebate on the first $3000.
Make it even better by putting that $540 rebate, when received, back into one of your super accounts also.
If you’re both earning less than $37,000, each of you should put $3000 into the other’s account and both of you would get the $540 back.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: firstname.lastname@example.org .