Super remains a super option for your financial future
While it’s never too late to start creating the financial future you dream of, it’s always better to start as early as possible because small amounts added to your superannuation when you are young can make a big difference to the size of your savings pool upon retirement.
The most tax effective way for most people to contribute to super is through salary sacrifice contributions.
Following the changes to superannuation announced in the federal government’s May 2009 budget, if you are under 50, you can make pre-tax contributions to super of up to $25,000 a year, which will be taxed within the fund at a maximum of 15% rather than your prevailing marginal tax rate.
If you are 50 or over, you can contribute $50,000 a year on a concessional basis until 30 June 2012, after which the cap reduces to $25,000 (indexed annually) for all age groups.
Though salary sacrifice is a relatively straightforward strategy, it’s essential to do your sums correctly. This is because any contributions made that exceed the respective cap will be taxed at 46.5% rather than the usual 15% concessional tax rate that applies to superannuation.
Despite reductions in the pre-tax superannuation contribution caps, the “Transition to Retirement” strategy is another ‘super’ approach to consider for building your retirement savings.
What is a Transition to Retirement (TtR) Strategy?
This strategy involves commencing a TtR pension from your existing superannuation benefits while you are still working, and at the same time, salary-sacrificing surplus income back into superannuation.
The benefits from a TtR pension arise for three reasons:
- Once you start a pension, the tax on the pension component of fund earnings reduces from 15% to nil.
- Any pension payments are usually taxable, but are accompanied by a 15% rebate for those under age 60 and are totally tax free for those over 60.
- Excess income can be salary sacrificed back into super, saving some tax along the way and helping you to accumulate even more benefits for your retirement.
With a TtR strategy you can restructure the way your income is received so that, while your day-to-day income may remain basically the same, your superannuation retirement balance can be significantly increased.
What is a TtR pension?
This enables you to receive regular payments from superannuation without the need to retire. It’s important to note that there are limits on the minimum and maximum levels of income obtainable from these pensions during a financial year. There are also restrictions on commuting these pensions back to a lump sum. Mostly this can only be done upon retirement or reaching age 65 (whichever comes first), or if you die or become permanently incapacitated.
Who can access a TtR pension?
Anyone who is 55 or older. You can establish a TtR pension if you are working full-time, whether or not you are looking to reduce your hours.
Speak to us about your superannuation strategy today!