Bruce Brammall, 5 December, 2018, Eureka Report
SUMMARY: Concessional contributions 101: Building your super and saving tax as you approach retirement.
I understand it can be a little hard to focus on long-term superannuation savings in December.
Half of Australians actually spend first, pay later, with the Christmas credit card not paid off until February or March.
Today I’m talking to the other half. The half that saves for Christmas and pays for it beforehand. From a financial perspective, Christmas is just about done for them.
That half is almost ready for January. And with the added downtime, it’s a great time of year to start planning. (Consider this column the seed to plant for January.)
For anyone within a decade of retirement, super planning is critical. And a big part of that strategy is about maximising your super contributions.
The difference between using that decade wisely and not, can be the difference of many tens of thousands of dollars in retirement. And that, for many, is the difference between a mediocre retirement and a fairly reasonable one.
So, what do you need to be thinking about when the new year ticks over?
Concessional contributions (CCs) are the epicentre of superannuation planning. This is how most people get most of their money into super.
For most employees, a good portion of it happens automatically. Currently, a minimum of 9.5% of your salary is paid into a super fund and, hopefully, automatically invested for you.
CCs are taxed “lightly”. That is, they are only taxed at a maximum of 15% on the way into the fund. This compares with marginal tax rates on earned income of up to 47%, for those who earn more than $180,000 a year.
(Those with incomes of lower than $37,000, whose marginal tax rate is generally no more than 21%, will generally be eligible for the low income superannuation tax offset – LISTO – which sees up to $500 paid into their superannuation account, to effectively mean no contributions tax has been paid.)
Because of the light tax treatment, there is a strict limit to how much you can put into your super as concessional contributions. This limit is $25,000 a year.
For the average worker earning $80,000, your employer will put in $7600 a year into your super fund.
That means that of your $25,000 CC limit, $7600 has been used up by your employer via the Superannuation Guarantee (SG). You still have ability to put in $17,400 more, tax concessionally, into super. Read on for details.
Why does the government tax super “lightly”?
For two reasons.
The first is to encourage people to save for their retirement. If you put away for your future into super, you’ll pay less tax than if you take it and spend it now. For someone on a marginal tax rate of 39% (those earning between $87,000 and $180,000), taking their last $10,000 of income would leave them with $6100 if they took it in the hand, or $8500 if they put it into super. That’s an extra $2400 that goes towards your retirement (see how to do that in the next section).
Secondly, so that it pays less tax on what it earns inside the fund, so there is more for your retirement.
Using the same salary as an example, if you earn $10,000 in income from investments outside of super, you would lose $3900 in tax (leaving $6100), but if you earned $10,000 in super, it would only lose $1500 in tax (leaving $8500 in your super fund).
Getting extra into super
Your employer’s contributions aren’t the only way you can get money into super.
You can put extra money in via the conventional way (salary sacrifice), or you can do it the “new” way (personal deductible contributions).
Salary sacrifice is, essentially, a three-way agreement, between you, your employer and the tax office. You tell your employer that you will sacrifice part of your salary into super (before you’ve earned it) and your employer puts it straight into super, where it is then taxed at 15%, not your marginal tax rate.
For employees, the second way – which has only been available since 1 July 2017 – is to put money straight into your super fund, then claim a tax deduction for it.
Let’s say you want to put in $10,000 into your super fund from your savings, on which you’ve already paid tax. If you put in that amount, it will be taxed at 15% by the fund ($1500), leaving you with $8500 in the fund.
But you get to claim a tax deduction for $10,000. If your marginal tax rate is 39% (those earning between $87,000 and $180,000), you will get a tax deduction for that $10,000, meaning you will get a tax return of $3900. For a net cost of $6100 ($10,000 minus $3900), you have got $8500 into super ($10,000 minus $1500).
It works out to be the same as if you had salary sacrificed the money into super. However, you can do it at any time of year, including in the days leading up to the end of financial year. (But you need to be sure the fund receives it by 30 June. That is, given bank transfers don’t always happen automatically, make sure you do it several days ahead of time.)
Those who are self-employed have it slightly differently. If you are truly self-employed, then you make personal deductible contributions, as you do not have an income on which you can pay the Superannuation Guarante (SG).
Why is this so important for 50 to 55 year olds?
It can be harder, when you’re 40, to make the “sacrifice” of putting extra money into super when you know you won’t be able to touch it for 20 or 25 years.
But anyone within 5-10 years of their retirement is within reach of getting access to their super. You’re so close you can almost touch it.
Maximising your CCs in the lead up to retirement is a no-brainer for those who do have some savings/investments outside of super. You are generally going to be far better to run those savings/investments down to take advantage of the tax savings from contributing to super, than paying full tax on it.
Once you turn 65, you have full access to your super. If you change jobs after turning 60, you can also apply to have full access to your super. (Both are known as meeting a “condition of release”, which turns your super into unrestricted non-preserved, giving you full access).
To repeat it … if you know that you will save $2400 a year in tax (for someone on a marginal tax rate of 39%) on $10,000 foregone to super, why wouldn’t you do it in the 5-10 years to retirement, particularly if you have other savings?
If you’ve got 10 years, there’s $24,000, plus whatever it earns, for a start. And many people can make concessional contributions of more than that.
Your individual circumstances
Concessional contributions are the power tool of superannuation.
Maximise them. Particularly in the last 5-10 years to retirement.
But importantly, if today’s column has turned on a light for you, get advice. Concessional contributions are just the start of how a properly orchestrated super plan can help to add tens, perhaps hundreds, of thousands of dollars to your superannuation pie.
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: email@example.com . Bruce’s sixth book, Mortgages Made Easy, is available now.