By Susan Hely, Money Magazine, May 2007
Many Australians would like to retire when they are 55, largely because 55 is the "preservation" age when they can access their superannuation. But the new super rules have put pressure on Australians to leave their super alone until they are at least 60, because then they can access their superannuation savings tax-free.
If you are 55, there are important superannuation strategies to put in place. They are designed to take advantage of the lower superannuation taxes and boost your super savings, says Sam Henderson, principal and senior financial adviser at Henderson Maxwell.
They involve salary sacrifice, transition to retirement allocation pensions (TRAPs) and, if you or your spouse earns less than $58,000, the superannuation co-contribution.
Superannuation is one of the best ways to accumulate wealth because it is one of the few favourably taxed investments. No other investment has a tax rate on earnings as low as 15 percent and this means your money can grow faster than investments taxed at a higher rate.
Salary sacrifice is a clever strategy to put more into your superannuation by sacrificing your pre-tax salary into your super fund. This means that instead of paying your marginal tax rate on your salary (which can be as high as 45 percent), your additional superannuation contributions are taxed at only 15 percent.
You could also pay less income tax because you reduce your gross taxable income. If you are earning $100,000 each year and you salary sacrifice $25,000, you will move from being taxed at 40 percent to being taxed at 30 percent on the $75,000 you earn. This is in addition to saving $10,000 a year in tax and building up your super.
The federal government has ended the reasonable benefit limit, so you don't have to worry about how much you will have in your super fund. In fact, the more you have the better, because when you turn 60 you will pay no tax on the money coming out of the fund.
But there are limits on contribution levels for the over-50s. After July 1 you can place a maximum tax-deductible amount of $100,000 each year into your superannuation until 2012. After that the level drops to $50,000 each year. Untaxed contributions have been limited to $150,000 a year or a three-year averaged amount of $450,000 lump sum if you are under 65.
How much should you salary sacrifice? "As much as you can afford you should really plug in as much as you can," says Henderson. He says more employers are allowing their employees to increase their input.
Salary sacrifice is different from personal, extra contributions paid out of after-tax contributions. These contributions have already been taxed as earnings at your marginal tax rate, so they are not taxed again.
If you make voluntary, after-tax contributions, you may qualify for the co-contribution scheme. The government will pay an amount into your super account if you earn less than $58,000 in a tax year and you make additional after-tax contributions.
To qualify for the maximum co-contribution, if you earn $28,000 or less the government will contribute up to a maximum of $1500 if you make a contribution of at least $1000 from your after-tax pay. The amount reduces by five cents for every dollar you earn over $28,000, phasing out completely once your income reaches $58,000.
Henderson likes transitional retirement allocated pensions (TRAPs), an income stream in the form of an allocated pension that you can take once you turn 55 and are still working. They are available with both managed and self-managed super funds.
"The great thing about a regular allocated pension is that you pay no capital gains tax and no tax on the investment earnings," he says. "Normally a superannuation fund will pay 15 percent tax on earnings and 10 percent capital gains tax. Additionally, the income stream is concessionally taxed, receiving a 15 percent income tax rebate, and any undeducted contributions (your own untaxed contributions) come back to you tax-free."
The best part is that while you are receiving your concessionally-taxed allocated pension income stream, you can salary sacrifice your normal income, reducing your tax rate from as much as 45 percent to 15 percent. Talk to your superannuation provider or financial planner. Not all super providers will offer a TRAP immediately. Self-managed super fund owners will need to consult their administrator and may need to make changes to the trust deed to enable this new income stream.
The TRAP provides an excellent opportunity for people over 55 to save significant amounts of income and capital gains tax.
For the complete story see Money Magazine's May 2007 issue. Subscribe now.