Getting more bang for your retirement bucks

What’s changed

Firstly, changes to tax brackets have resulted in a massive 200 per cent increase in the top marginal tax rate threshold since 2002.

In fact, less than 2 per cent of Australians now fall into the top tax bracket.

Tax offsets have also risen significantly, meaning Australians of age pension age can now earn more non-super income before paying any tax.

A single male aged over 65 (or female aged over 63.5) can earn $25,867 before paying tax, and a couple can earn $43,360.

Furthermore, the biggest ever reform to super, which came into effect on July 1, 2007, has made superannuation laws much simpler and more flexible.

Use it or lose it

The golden rule for people planning for retirement under the new super rules is to use the benefits available to them in the system.

One of the key changes to super rules — the removal of the Reasonable Benefits Limits (RBLs) — now means that people can accumulate as much as they like in a super fund without paying any additional tax upon withdrawal when aged over 60, making super a very tax efficient wealth accumulation structure.

There are limits on how much money people can pump into their super without being taxed. People can contribute up to $150,000 per financial year, or up to $450,000 over three financial years of non-concessional (after tax) contributions.

People who are 50 already, or turning 50 up until the 2011-12 financial year, will benefit from a transitional period in which they can make up to $100,000 of concessional, or tax deductible, contributions into their super each financial year.

For all other people under 50, there are tax deductions on concessional contributions of up to $50,000 (which includes salary sacrifice contributions and employer super guarantee) as a major incentive to get them to start contributing to super sooner rather than later.

The news is also good for self-employed people. They too can now claim the full amount of their concessional contributions, up to $50,000 per financial year ($100,000 if aged over 50 until 2011-12).

Greater concessional contributions are all the more reason for younger Australians to start directing more money into superannuation earlier. Generation X and Ys can take advantage of the tax concessions associated with salary sacrificing to super and at the same time start building their retirement wealth.

For example, if Peter earns a salary of $70,000 and contributes $3,500 of his salary to super using salary sacrifice, he will only pay income tax on $66,500 instead of $70,000.

Another tax-effective method for employed and self-employed people to save for their retirement is the superannuation co-contribution. Under this scheme (subject to other criteria), the Federal Government contributes $1.50 for each $1 you contribute (up to a maximum of $1,500 per year) if your assessable income is less than $28,980. The super co-contribution progressively reduces for incomes over this amount and phases out completely at $58,980.

Unlocking your super

Greater flexibility with the laws on how and when people can access their super has a significant impact on people’s income in retirement, as well as in the years leading up to retirement.

If you are aged 60 or over, you can receive payments from your super without any tax paid on these benefits.

Under the new superannuation system, starting a Transition to Retirement (TTR) income stream from the age of 55 is the most tax efficient way to create wealth. A TTR ‘income swap’ strategy has the ‘double whammy’ effect of actually allowing people to start drawing down on their super fund in the lead up to retirement while at the same time boosting their super balance through salary sacrifice.

For example, William, 55, is a full time, self-employed computer technician with an annual income of $95,000. He chooses to salary sacrifice $37,792 into his super and starts drawing a maximum $30,000 from his super balance of $300,000 through a TTR allocated pension.

Using this ‘income swap’ strategy, William’s net income remains the same for meeting his living expenses while his super is increased by $2,038 in the first year and his after tax contributions and TTR allocated pension payments are taken out.

In addition to this, the money now invested in a TTR allocated pension has no tax applied on the earnings, compared to 15 per cent tax that would have applied on earnings while the money was in accumulation phase within super, thereby further increasing the overall benefit of the strategy.

Super insurance

Changes to superannuation rules, especially the abolition of the RBLs, have made insurance in super so attractive that everyone should consider using their super to fund their life insurance needs. These new rules also mean people can insure themselves and their families for what they actually need, not just at an arbitrary level.

Premiums can be made in pre-tax dollars (ie, as a concessional contribution), which effectively reduces the cost, and having insurance through super can also help with cash flow problems by using salary sacrifice contributions to pay premiums.

Using a simple strategy of super ‘recontribution’, parents can also now ensure their adult children receive their lump sum death benefits from super tax free. This strategy involves withdrawing money from super and then, subject to the contribution cap, re-investing it as a non-concessional super contribution.

While the main aim of a recontribution strategy for people aged 55 to 59 is to reduce the amount of tax retired people pay on income streams, the strategy also offers benefits beyond age 60 for estate planning. It is an easy way for parents of any age with adult independent children or other beneficiaries to minimise the amount of tax paid on super benefits should they die.

John Perri is the technical services manager at AMP Technical and Professional Services.