18. Understanding the super rules if you’re 35-54
You may think that you currently have other priorities that are more important than super. You may also think that saving for your retirement, or worrying about changes to the superannuation rules can wait, right? Wrong. Superannuation rules changed. The rules are now not only simpler, they're more attractive than before.
The super rules |
|---|
Tax free super at age 60 |
No Reasonable Benefit Limits (RBLs) |
After-tax contributions limited to $150,000 a year1
Any contributions made over this limit will be taxed at the top Marginal Tax Rate (plus the Medicare levy). |
Before-tax contributions are limited to $50,000 a year1 If you’re over 50, you can make $100,000 a year in before-tax contributions until 30 June 20123. Any contributions made over this limit will be taxed at the top Marginal Tax Rate (plus the Medicare levy) and counted towards the after-tax contributions limit. Please note: Special conditions apply for Defined Benefit schemes. |
| Your Tax File Number is required If your Tax File Number is not provided to your super fund:
|
1. These limits will be indexed to Average Weekly Ordinary Time Earnings (AWOTE). The limits for before-tax contributions will only be increased by amounts of $5,000 once the increase is greater than $5,000. The limit for after-tax contributions will always be three times the limit for before-tax contributions.
2. It is your responsibility to ensure you do not exceed the before-tax contribution limit.
3. The $100,000 limit will not be indexed.
4. The $1,000 relief does not apply to new super accounts from 1 July 2007.
What’s in it for me?
Investing in superannuation has always been a great way to save for retirement and the changes to super rules now make it an even more attractive option. With this in mind, here are some strategies for you to consider:
Strategy 1
Salary sacrifice could save you tax
Salary sacrifice can be an effective strategy, because it allows you to put your before-tax salary straight into super - potentially saving you tax.
Super is no longer taxed when you withdraw it, as long as you wait until age 60 to make withdrawals. This could result in significant tax savings.
If your total income is $50,000 a year, here’s how a $5,000 salary sacrifice could help save you tax and boost your wealth:
|
Take Cash Salary | Salary Sacrifice into Super |
|---|---|---|
Gross salary |
$50,000 |
$50,000 |
Less: salary sacrifice |
- |
$5,000 |
Taxable income |
$50,000 |
$45,000 |
Less: income tax |
$11,010 |
$9,435 |
Net take home pay |
$38,990 |
$35,565 |
Super salary sacrifice |
- |
$5,000 |
Less: 15% contribution tax |
- |
$750 |
Net super investment |
- |
$4,250 |
| Take home pay plus net super investment |
$38,990 | $39,815 |
Note: This is a tax only strategy. Marginal tax rates for 2006-07, including 1.5% Medicare Levy have been applied.
It’s important to note the example above does not take into account your eligibility for the Government co-contribution, which you may receive as a result of making after-tax contributions. You may be eligible for the Government co-contribution if your total income (assessable income plus reportable fringe benefits) is less than $58,980 a year. Other conditions apply.
With this in mind, you should consider your own personal circumstances before making either before-tax and/or after-tax contributions. See our ‘Super Co-contributions’ fact sheet for more information.
Strategy 2
Contribute more now
If you’re under 50, the limit on before-tax contributions will be $50,000 a year. However, if you’re 50 years of age or older, the limit will be $100,000 p.a. until 30 June 2012.
Strategy 3
Add more to your super
The $150,000 p.a. limit will apply, however, to accommodate larger contributions, people under age 65 will be allowed to bring forward two years of contributions. For example, a person under age 65 will be able to make up to $450,000 of contributions in the 2007-08 financial year but will then be unable to make further non-concessional contributions until the 2010-11 financial year.
Strategy 4
Slow and steady wins the race
Previously, it was possible to prioritise things like mortgages and children’s educations above super because you could leave retirement planning until later in life. Many people were able to ‘top up’ their super later in life with an inheritance, another form of investment, or by salary sacrificing most of their income. The new super rules mean that this may no longer be the case.
The changes mean that there are limits around the amount you can put into super each year. This means you may need to change your approach and start making additional super contributions earlier. By doing so, you may also benefit from the power of compound interest. This means that if you start making regular contributions early you won’t need to contribute as much as if you leave it until later down the track.
Case study
Let’s look at the following example of two different members of a super fund, James and Jessica. They both earn $60,000 a year, have super balances of $40,000 and have just turned 40. Neither of them have spent much time thinking about their super in the past.
Jessica went to a workplace seminar about super, and realised that she would have to make additional voluntary contributions to her super to ensure a ‘modest but adequate’ lifestyle in retirement. She used Russell’s Web site calculator and determined that if she salary sacrificed an additional 5% of her salary each year, she would have around $897,000 when she retires at 65. This will be enough for her to live on 40% of the income she has just before she retires, until she’s 90 years of age.
James is happy to rely solely on his employer super contributions of 9% of salary. When he’s 64, a few months before his planned retirement, James goes to see a financial planner. He has $654,000 in super, and the planner works out that this will only give him an income in retirement of around 29% of his current income.
James decides that he needs the same amount as Jessica to retire with a ‘modest but adequate’ lifestyle. To provide this, James would need to make an after-tax contribution of $243,000 to his super just before he retires.
| Jessica and James's super balance growth |
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 |
Jessica and James’ super balances are shown on the graph above. Although they have ended up with the same amount at retirement, they got there using two very different paths.
James encounters two problems as he approaches retirement. Firstly, he needs to come up with a lump sum to contribute to super in the last few months before retirement. Secondly, because James did not add to his super earlier, he didn’t benefit from the power of compound interest and contributed $136,800 more than Jessica to receive the same outcome.
Case Study Assumptions:
- Average rate of investment return (net of tax): 7.0% p.a.
- Average rate of salary growth from age 40 to age 65: 4.0% p.a.
- Average rate of price increases between 65 and 90: 3.0% p.a.
- Jessica’s savings assumed to be salary sacrifice. Jessica has to pay 15% contributions tax on the 5% of her pay that she salary sacrifices into super, resulting in a net amount of 4.3% of her pay ending up in her super account.
Strategy 5
Choose how and when you retire
Up until now, most people have worked full-time until they reach a certain age, then permanently retire.
Whilst many people will still approach retirement this way, increasingly people are opting towards a gradual reduction of working hours over a number of years. Many Australians are opting for a ‘sea change’, where they continue to work part-time in a job they enjoy – perhaps even well into their 70’s – but also have extra time for travel, family and themselves.
You now have greater flexibility as to how and when to draw down your superannuation. You no longer have to take your super at a certain age, and you can start a transition to retirement allocated pension while you’re still working to supplement your income if you move to part-time work.
When you can access your superannuation is based on your preservation age, as listed in the table below:
| Date of Birth | Preservation Age* |
|---|---|
Before 01/07/60 |
55 |
1/7/60 – 30/06/61 |
56 |
1/7/61 – 30/06/62 |
57 |
1/7/62 – 30/06/63 |
58 |
1/7/63 – 30/06/64 |
59 |
After 01/07/64 |
60 |
*when you can start to access your super
For more information, read our ‘Ease yourself into retirement’ fact sheet.
Strategy 6
Consider waiting until age 60 to draw on super
If you wait until age 60 to withdraw from your super, it will be tax free. You can take your super out before age 60, provided you’ve reached your preservation age, however, if you do, part of your super will still be taxed.
| Super Checklist: Consider the following strategies to make the most of the new rules: | ||
|---|---|---|
| Strategy | Why? | What to do next |
Give Russell SuperSolution your Tax File Number (TFN) |
This prevents you paying unnecessary taxes and allows you to make after-tax contributions. |
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Consider making additional contributions:
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Please note contribution limits apply.
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| Consider waiting until you reach age 60 to access your super | Ensures the super you withdraw is tax-free. | Call our Helpline to discuss your options. |
Do you have more questions?
Helpline: 1800 555 667
Web site: www.russell.com.au
Email: yoursupersolution@russellsuper.com
Need advice?
We can also refer you to a qualified Financial Adviser.
Issued by Russell Employee Benefits Pty Ltd ABN 70 099 865 013, AFSL 220705 (“REB”). This document provides general information only and has not been prepared having regard to your objectives, financial situation or needs. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. The information has been compiled from sources considered to be reliable, but is not guaranteed. Any examples have been included for demonstrational purposes only and should not be relied upon for the purpose of making an investment decision. Past performance is not a reliable indicator of future performance. Any potential investor should consider the latest Product Disclosure Statement in deciding whether to acquire, or to continue to hold, an investment in Russell SuperSolution. REB is part of the Russell Investment Group (‘Russell’). Russell or its associates, officers or employees may have interests in the financial products referred to in this magazine by acting in various roles including broker or adviser, and may receive fees, brokerage or commissions for acting in these capacities. In addition, Russell or its associates, officers or employees may buy or sell the financial products as principal or agent. You may contact Russell SuperSolution on 1800 555 667.