(03) 9020 2905PORTFOLIO POINT: Uneven incomes in your couple? And at least one of you is considering a pension? Here’s a strategy for you.
Money is, from the results of most surveys, one of the top three topics for arguments in a household.
The joining of a couple’s finances can lead to all sorts of tensions, from “yours and mine”, to “yours, mine and ours” and those account structures that are completely shared.
However, silly and costly decisions are often made, that cost the individuals or the couple (as a whole) money, because of a want to keep finances completely separate.
At some stage in a relationship, most couples will begin to take a holistic view of their finances. Or they should, at least on some levels.
Whether it comes from making a decision on whose name to hold an investment property in, or whose name shares should be bought in, or the name on the bank account earning interest.
Superannuation is certainly an area where couples should take more of a shared approach to the household finances. I’ve touched on some of these areas in the past (see 25/1/12). But today I’m going to look specifically at transition to retirement and salary sacrifice arrangements where couples often must act as a team, or unnecessarily donate extra to the tax man.
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Normally, an individual considering their superannuation contribution and pension strategies is adding and subtracting from their own salary. Salary sacrifice your wages down, top up with income from a pension fund.
But when there is a couple, it will often make more sense to look at two tax circumstances, particularly where those couples are earning different amounts, or more accurately in different marginal tax brackets.
For example, let’s take a 60-year-old male earning $80,000 a year with $150,000 in super. He needs to maintain their current post-tax income.
In the FY14 year, the superannuation guarantee payment would be $7400, leaving the ability to salary sacrifice up to $27,600 into their super fund. (Remember: People over 60 have a concessional contributions cap of $35,000 for the 2014 financial year.)
That will see a reduction, from the salary sacrifice alone, in his net income of approximately $18,216. Under TTR rules, he can only take out up to 10% of his pension account – in this case, $15,000.
If proceeding with the salary sacrifice, this would leave him more than $3200 less in his pocket each year.
Unfortunately, as he needs to maintain his current income, he is going to have to reduce his salary sacrifice by around $3800 to $23,800. This means he’s not effectively using his $35,000 concessional contributions cap for the FY14 year.
Enter your partner
But he is married and his partner is 58, not working and has negligible assessable income. She also has a super balance of $100,000.
She could take the extra income from her super. Or she could take out more than the $3200 and he could take out less.
This would allow the working partner to make the maximum $35,000 in concessional contributions, allow the couple to minimise their tax and maximise their superannuation.
All of these decisions have flow on benefits down the track as well, as any money that stays in super is taxed at a lower rate, or potentially at zero, after a pension is started.
Both under 60
Take another couple, where both are under 60, but one is working and the other is not.
The wife, 58, earns $90,000 and has $300,000 in super. The husband isn’t working and also has $300,000 in super.
In this example, it would make far more sense for the wife to salary sacrifice right up to her limit of $16,675 ($25,000 less $8325 in SG).
The non-earning husband should take the super income, as required. If the wife took the income, she would still pay tax on the income, as she is under 60 and is only eligible for the tax rebate.
The husband could take a pension of $10,556 to keep them with the same net after-tax income. He would pay no tax on that income, if his total income stayed below the tax-free threshold of $18,200.
The wife would save approximately $3618 in tax by contributing it to super instead of taking it as salary and no income would be lost to the household.
What else to consider
If the individual earns almost all of their salary in the higher tax brackets (that is, above $80,000 for a 38.5% marginal tax rate, or above $180,000 for a 46.5% marginal tax rate), the savings from salary sacrifice obviously become larger.
However, the amount that they can salary sacrifice up to their concessional contributions limit becomes less. That is, if a 58-year-old is earning $200,000, they are already receiving $18,500 in SG payments, leaving them only $6500 that they can salary sacrifice.
If a 62-year-old was earning $200,000, they would have $16,500 that they could salary sacrifice, up to their limit of $35,000 for the 2014 financial year.
Also, if one member of a couple is over 60, then they are not going to pay tax on any income they draw from their super fund.
If both partners are working, the calculations just become a little more complex. But in essence, the questions that need to be answered to construct the best strategy revolve around where the biggest benefit will come from the salary sacrifice strategy and where can the least tax be paid on any income that is required to be drawn to top household income back up to the required level.
There are a number of variables that will make your circumstances different to what we’ve discussed here. And it is, inevitably, more complex than the simple examples used here. See a qualified financial adviser to help you with the numbers, if you believe these circumstances might apply to you.
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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 director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au