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Bruce Brammall, The Australian, 30 July, 2023
Superannuation is usually seen as an individual’s life-long struggle to work the odds, to create their best retirement.
But if you’re part of a couple, continuing to play the super game as a single means you’re probably missing opportunities. You don’t know, or haven’t read, the rules properly.
That’s understandable. Because they can be bloody complex!
The best results in superannuation for a couple can come when they stop seeing it as individuals and play it as a team sport. Working together can often achieve far more than two individuals can by playing super solo.
It’s not talked about enough. And it’s certainly not done often enough. But, when two people decide to share a life and finances together, a combined super strategy really should be part of that conversation.
Why? At a core level, super’s main rules are individual based. But governments have written some rules specifically to allow individuals to get a better result by working together. And there are other rules that, with some (completely legal) wrangling, can be used better as a team.
Today, I’ll open the door to some of those strategies. Some are very complex. If they strike a chord, speak to a financial adviser about how to implement them for your couples team. Don’t just bumble your way through it. Mistakes can be costly.
And I’ll do it without going into self-managed super funds. SMSFs are powerful investment vehicles that can be used well by couples. But these strategies today can be considered by any couples with regular super funds.
Baseline problems
If you want to look at it one way, superannuation is a bunch of rules that are really just pretty cool tax breaks.
You pay less tax on your superannuation money than you would on most earned income, while you build it. The trade-off is that you can’t touch it until you turn 60 or 65. (And at some point, it becomes completely tax free.)
Because of its effective “tax haven” status, governments impose limits on how much they will allow individuals to push into this tax break.
This results in each individual having caps on how much they can put into super. And to make matters more difficult, there are limits that work on top of limits.
Yep, complex stuff. But stick with me.
The limits include concessional contributions limits of $27,500 a year, non-concessional contribution limits of $110,000 a year, limits on contributions by age, the amounts you can move from an accumulation account into a pension account and amounts such as the “five-year carry-forward” provisions.
Often high-earning members, on their own, can hit their individual limits. But they often fail to consider they could push the rules further, by then moving focus to their partner, who couldn’t necessarily also do it.
Pension limit
While it might seem like an unattainable figure to many, the first limit to understand is that governments will only allow an individual to turn on a pension with a maximum of $1.9 million.
If there’s a couple, than means they could both turn on pensions for that amount, meaning combined tax-free pensions of $3.8 million.
However, what often happens is that one partner earns a much higher salary, meaning their super balance would naturally be considerably higher.
What if a couple managed to build a total of $3 million in super at the time of their retirement, but it was split $2.7 million in one account and $300,000 in the other?
They would be able to turn on two pensions – one for $1.9 million and one for $300,000. That leaves the person with the higher super balance with $800,000 left in accumulation, where it would continue to pay tax.
However, if some years before retiring, the couple were to start working together to even up their super balances, they could potentially end up with the entire $3 million being in tax-free pensions.
Share your super? What?
Gimme some super
One of the simpler strategies is to use the “spouse super splitting” rules, over a number of years.
This strategy allows for a spouse to transfer the concessional contributions (largely your employer’s 11 per cent super payments and salary sacrifice) they made in the last financial year to their spouse.
If you have a big discrepancy between super balances, transferring this from the higher balance to the lower balance, after the end of a financial year, can make a big difference.
It’s limited to those concessional contributions. If done consistently each year, it can have a big impact. If there is likely to be a big difference in the super balances, doing this for 10 or 20 years before retirement could potentially transfer hundreds of thousands of dollars, plus ongoing associated earnings, to the lower super spouse.
Maxing salary sacrifice
Higher earners get a bigger relative benefit from salary sacrifice. That is, someone who is earning more than $180,000 a year gets a relatively larger benefit than someone earning, say, $70,000 a year.
The top marginal tax rate in Australia is 47 per cent for those earning more than $180,000, while the person earning $70,000 is only paying tax at 34.5 per cent.
Salary sacrificing to super swaps those marginal tax rates for what is effectively a 15 per cent contributions tax. So the higher earning spouse gets a benefit of 32 per cent, while the other gets a benefit of 19.5 per cent.
Therefore, if only a limited amount of extra super contributions could be made from the family budget, the bigger tax advantage might come by doing it from the higher-earning member.
If they want it to ultimately go to the person on the lower income, the higher earner could do the salary sacrifice, then, using the spouse splitting rules above, transfer it to the lower earning spouse.
Catching up
This can be taken to another level completely for some couples.
In 2017, the government changed the rules to allow people to “carry forward” unused portions of their concessional contributions – which used to be $25,000 and is now $27,500 since the FY22 year.
Let’s say you haven’t been salary sacrificing, but your employer has put in $12,000 a year in superannuation guarantee contributions each year over the previous four years.
Using the carry forward rules, you might be able to put in a significantly higher amount into super as concessional contributions (either as salary sacrifice or personal deductible contributions) and then split that higher figure to your spouse, by using your unused caps from previous years.
Note: you can only use the carry forward rules if your super balance is below $500,000 at the start of a financial year.
The details of what you have contributed in previous years can be found through your mygov account.
The rules here require careful implementation. They are complex. If unsure, don’t guess. See a financial adviser.
But done properly, it could allow couples to, again, get more into super by combining it and potentially transfer using spouse splitting.
The age gap
Spouse splitting contributions can also be used in other ways, to achieve other aims, particularly where there is an age gap between a couple.
Two important reasons might be around getting access to the age pension, or potentially getting access to more super earlier.
Splitting contributions to the younger person might allow the older person to get a higher government age pension. Money split from the younger spouse to the older spouse might allow them to gain access to more super earlier when they meet eligibility requirements – generally turning 65 or changing jobs after age 60.
Low-income earners
And some rules are a little more straight up and down and easier to understand.
The “low-income spouse contribution” (LISC) is available to members of a couple who earn less than $37,000 a year (and fades at $40,000).
Contribute $3000 as a contribution to your spouse’s super account and you will get a tax offset of $540.
The love-in
If you’ve made enough of a commitment to your significant other, and finances are beginning to, or already are, entangled, then super is often not something that comes into consideration.
It should. There are a number of strategies that can work for couples in many circumstances. But, particularly for high income earners who are likely to achieve significant balances, not starting work on it at a relatively early age, could lead to you paying more tax than you should later in life.
Bruce Brammall is both a financial adviser and mortgage broker and author of books including Debt Man Walking. E: bruce@brucebrammallfinancial.com.au.