With 30 June fast approaching, we thought it would be an ideal time to highlight a number of well known and perhaps not so well known tips to boosting your superannuation.
As you get older, hopefully your financial commitments start to reduce i.e. no more expenses associated with having children, etc. Therefore, this is an ideal time to consider contributing more to your superannuation.
For the current financial year, you can contribute up to $30,000 a year into superannuation if you are under50 or up to $35,000 if you are 50 and over.
These contributions are taxed at 15% which in most situations is significantly less than your marginal tax rate.
Not only are you boosting to your superannuation, but you are saving tax at the same time!
You can also contribute a further $180,000 a year in “personal” contributions – these are contributions you don’t want a tax deduction for. Furthermore, you can trigger what is known as the “bring forward rule” and contribute three lots of $180,000 (i.e. $540,000) in the one financial year.
It is important to note that once you trigger the bring forward rule, you cannot make any further personal contributions until for the next three years.
The ability to contribute large amounts into superannuation is ideal if you have funds sitting in a cash account after an asset sale, etc..
Once you reach 65 and retire, you can no longer contribute to superannuation. But if you are still working and satisfy the work test – working 40 hours in a 30 day period – you can contribute to super up to age 74.
Superannuation legislation allows you to “split” your contributions with your spouse by putting up to 85% of your superannuation into their superannuation.
This strategy works very well where there is a difference in ages and account balances. A younger spouse can split their concessional super contributions with an older spouse. This means the funds in superannuation can be accessed at an earlier date.
For example, if Bob aged 60, and his wife Betty aged 50, are both working, Betty can split her contributions so that Bob can access the funds earlier via a Transition to retirement pension.
This strategy provides more funds in the “pension phase” where investment earnings of your superannuation are tax free. It also allows Bob and Betty additional funds to pay off any debts more quickly whilst lowering their overall tax liability at the same time.
Instead of having to wait until you retire to access your super, you can commence drawing a Transition to retirement pension at age 55.
These pensions are considered “non-commutable” which generally means that you cannot withdraw lump sums and are confined to minimum and maximum draw downs each year.
Combining this strategy with the salary sacrificing strategy (see above) can see your superannuation balance grow significantly in a very short period of time.
Furthermore, the fact that the investment earnings in a pension account are tax free, also helps boost your superannuation.
When you turn 60 you won’t have to pay tax on the pension income. If you are under 60, you will receive a 15% rebate on your pension income.
The final tip is one that is perhaps not considered anywhere near as much as it should be.
Most people are unaware that when they die and their adult children receive their superannuation, they may have to pay up to 17% tax on the superannuation payout. Furthermore, this tax rate increases to 32% on any insurance payouts.
But there is a way that you can reduce this tax burden on your adult children.
Your superannuation balance is made of two components – taxable and tax free.
The 17% tax rate applies to the taxable component only.
Therefore, if you were to draw out either all or a large portion of your superannuation balance and then re-contribute it back into superannuation, it will be added to your tax free component and therefore tax free to any adult beneficiaries.
There are a number of criteria to satisfy in before you can implement this strategy, but it can be well and truly worthwhile.
If you would like to discuss any of these superannuation tips further, please contact Ellingsen Partners.