(03) 9020 2905PORTFOLIO POINT: Super double up. If you’re a couple, then combining your TTR and salary sacrifice strategies can lead to even more powerful results.
The great thing about Transition to Retirement (TTR) strategies is that there are no so few losers. Generally, you’ll pay less tax on the income stream that you receive from your super fund. And then to get the real benefits, it’s combined with salary sacrifice, which will see you paying less tax on your super contributions.
I’ve written several columns recently on the benefits of Transition to Retirement (TTR) and salary sacrifice strategies. But pretty much all of the strategies have used the example of individuals. If you’d like to go back to read those columns, click here (December 8), here (January 28) and here (February 16).
But as powerful as those strategies are, they are potentially only half the story. That is, if you’re married, or otherwise financially intertwined with another person, then TTR / salary sacrifice can be refined to create even better outcomes than the same two individuals acting alone.
That’s right. One plus one can equal three when combining these strategies as a couple, particularly if the couple is of different ages or different incomes.
So, today I’ll outline how some of those strategies can be implemented and the sorts of things you need to think about when looking at these strategies.
First, please note …
The basis of all the following strategies relies on a couple knowing how much money they need. That might be how much they need to live on, or how much money they need to cover their expenses. You need to have that as a starting point, as all TTR/salsac strategies revolve around this number.
For this exercise, I’m also assuming that finances are joint. I realise that many couples have “yours, mine and ours” when it comes to money. In order to get the most out of the situations below, I’m assuming that, in order to save on tax, that your finances are fluid.
And I am not going to run through all of the numbers in the scenarios below. It would be too complex – a mass of numbers that would be confusing. If the strategies below appear to make some sense to your situation, then you will need to speak to a professional adviser.
Scenario one:
One person is aged 50, is earning$150,000 and has $300,000 in super. The partner earns $70,000, is aged 57 and has $700,000 in super
If treated as two individuals, the older person would probably consider the TTR/SalSac strategies previous covered, as they are older than 55.
They would most likely have a balancing act to cover. They might consider sacrificing the maximum $50,000 (which would include the 9% Superannuation Guarantee) and then do a TTR pension to cover the shortfall. That person would be ahead on both sides and could end up with more in super.
But anything they sacrificed below $37,000 would be of marginal benefit. The lower-earning partner would be weighing up losing 15% of the super contributions, where they would pay no more than 16.5% if they took it as salary.
There are considerable extra savings to be made if household finances are considered joint here. Firstly, it would make far more sense for the higher-earning spouse to be the first to do the salary sacrificing.
The higher earner has more to gain – because of the higher marginal tax rate of 38.5%. If that spouse salary sacrificed $36,500 (to take them to $50,000 total, including 9% SG), there would be a tax saving of $8577, which would go into super.
(If the lower-earner contributed the $36,500, the tax saving would be no more than $6022, because of the lower marginal tax rate.)
The older, lower-earning, spouse can take up to 10% of their super, or $70,000, on which there would be a tax rebate of 15%, so it’s more tax advantaged than taking ordinary income.
Solution: Start by salary sacrificing for the higher-earning spouse, because of the larger difference between the super contributions tax rate of 15% and the marginal tax rate. After that, in this case, it then becomes a balancing act of drawing a super pension for the older member and also salary sacrificing
Scenario two:
Younger member of couple is 53 and earns $120,000 and has $400,000 in super. Elder is 61 and earns $80,000 and has $500,000 in super
Again, if treated as individuals, the older person should be on a TTR pension from their super fund and should be making concessional contributions up to the $50,000 limit each year. The income from super would now be tax-free because they are over 60. That would mean that even less needs to be drawn from the super fund, thereby keeping more in super, to cover the salary sacrificed contributions of $42,800 ($50,000 minus SG contributions of $7200). In total, this couple would be contributing a total of about $60,800 to super ($10,800 for lower earning spouse and $50,000) for higher earning spouse.
In this case, the main difference is that any income drawn by the elder person from their super fund will be tax free.
The starting point is again that the higher-earner should salary sacrifice $39,200 ($50,000 minus SG contributions of $10,800). All of that salary sacrifice would receive a larger tax discount than the older partner would receive, as the marginal tax rate is higher.
A maximum tax-free income of $50,000 can be taken from the elder’s super fund (10% of the balance). The balancing act comes in here again. If we assume that the household income was just right for their current needs and they didn’t want to be any worse off, then that could be achieved by the lower-earner salary sacrificing to approximately $30,400.
It’s not the full $50,000, but they’ll end up with the same amount of money in their hand each month and having made joint super contributions of approximately $87,600, verus the previous contributions of $60,800.
Scenario three:
Younger member of couple is 57, has $500,000 in super and earns $120,000. The older member has retired and has just $200,000 in super
If you take the single person who has retired, you’d probably have them on a super pension of whatever they need. They are too young yet to get the government age pension, so they’re going to have to live off their super. And, given it’s not a huge sum, they are probably up for some serious budgetting.
This is where it’s probably most obvious that joint finances are going to need to be required. But it’s also where the most good can be achieved.
As the elder member is over 60 and retired, there is no limit to how much super they can access. They could take the lot tomorrow, if they so wished.
Because of that and the fact that the younger person is still earning a good income, there would be significant benefit to salary sacrificing, potentially up to the limit of $50,000. The $39,200 that could be sacrificed by the higher earner here (as with previous example) would see considerable savings made from a marginal tax rate perspective.
The main difference here is that while there is three years to go before the younger member can access their super tax free, they can start to access their super via a TTR pension. However, there would still be some tax to be paid on any pension income stream taken by that person. Therefore, the best strategy would be to make concessional contributions up to the limit for the younger person, while taking whatever was needed from the tax-free pension of the older member.
If extra is still required – hopefully not – then a small pension could be taken from younger person via a TTR.
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The point of the above three scenarios is to suggest that doing one person’s finance in isolation risks missing some potentially considerable benefits of having joint finances to make the most of TTR/Salary Sacrifice contributions.
Everybody’s situation is different. But you need to understand that TTR, salary sacrifice and super pensions are predominantly tax strategies.
Nobody knowingly pays more tax than they need to. But by not sitting down and analysing your situation – preferably with a licensed financial adviser and/or accountant – then there’s a good chance that you are donating more to the ATO than you really need to. And after decades of working, paying your taxes and trying to build a nest-egg for yourself, why would you not maximise your entitlements when it matters most?
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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 advised to consult your financial adviser.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.