Transcript End of year super strategies
‘Super Top Up’ Strategies
Smart ways
to save on tax and boost your retirement outlook
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• Your experience?
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Why invest in super?
• Super can be a tax-effective savings vehicles - helping you save more for (and during) your retirement. • Super benefit payments are generally tax free (after age 60) • Investment earnings are taxed at 15% within super vs up to 49% outside of super).
• Every extra contribution makes a difference to improving your lifestyle in retirement.
• There are limits on how much you can put into super, so you can’t leave it to the last minute to lump large sums.
Government incentives and its tax-effective nature make super a very attractive investment vehicle to save for your retirement.
GROW your super with contribution cap changes!
Recent super changes mean you now have an opportunity to add more to your super – helping you save more and boost your retirement outlook. On 1 July 2014 the concessional contributions cap increased to $30,000 (from $25,000). However if you are age 50 or over on 30 June 2015, you have a higher concessional contributions cap of $35,000. The non-concessional contributions cap also increased to $180,000 (from $150,000) or $540,000 (from $450,000) using the bring-forward rule.
Why invest in super? – case study
Meet Simon • 40 years of age • Earns $75,000 p.a.
• Has $80,000 in savings to invest Let’s compare investing outside super versus investing inside super .
Why invest in super? – case study cont…
Simon invests $60,000 in shares and $20,000 in cash: Total amount invested
Investment outside super
$60,000 in shares $20,000 in cash
Investment inside super
$60,000 in shares $20,000 in cash
Total investment amount after 20 years $267,029 $334,057
Investing outside and inside super means a
big difference
of $67,028
Investing outside super vs. inside super
400 000
Value of investment over 20 years
350 000 300 000 In own name Super 250 000 200 000 150 000 100 000 50 000 0 1 2 3 4 5 6 7 8 9 10
Year
11 12 13 14 15 16 17 18 19 20 Assumptions: Marginal tax rate outside super is 34.5% (including Medicare Levy and Temporary Budget Repair Levy). CGT and income tax is taken into account at all times. CGT discount for 12 month ownership applied (50% in personal name, 33.33% in super fund). Net of tax earnings are reinvested. Tax rate inside super is 15%. Returns from the portfolio are 8% (5% capital gain, 3% income) both inside and outside super. 80% of the income from the portfolio is franked.
Will you have enough?
• Super is a primary source of income for most Australians in retirement.
• However, many of us are not saving enough to achieve a comfortable retirement.
Single Retirement income required to retire comfortably 1 $42,433 p.a.
Current government age pension rate 2 $22,211.80 p.a.
Couple $58,128 p.a.
$33,488.00 p.a.
• Will your super be enough to make up the difference?
• Do you want more than a ‘comfortable’ retirement?
1 2 Source: The Association of Superannuation Funds of Australia Limited (ASFA), ‘
Retirement Standard’
, June 2014 Effective from September 2014
Strategy: salary sacrifice
Salary sacrifice to tax-effectively save for retirement by contributing more into super.
What is it?
Salary sacrifice is an arrangement with your employer where you agree to forgo part or all of your pre-tax salary, in return for your employer making superannuation contributions for the same amount.
How can you benefit?
•Boost your retirement savings.
•Your salary sacrifice contribution is generally taxed at 15% inside super rather than at your marginal tax rate outside of super.
Strategy: salary sacrifice
Who can this strategy work for?
Salary sacrifice can work effectively if you: • want to grow your retirement savings sooner • are under 75 years of age* • are eligible to contribute to super • generally have a marginal tax rate above 15% • can salary sacrifice income without it having a major impact in your lifestyle • have an employer willing to establish a salary sacrifice agreement.
* Contributions may be received on or before the 28th day of the month following the month the member turns 75
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Concessional contributions cap
Concessional contributions (those made with pre-tax income):
• are generally subject to 15%^ contributions tax in your super fund up to the cap and include: – employer contributions such as Super Guarantee and salary sacrifice contributions – personal deductible contributions for which a tax deduction has been allowed.
Concessional contributions cap
• For 2014/15 financial year the general concessional cap is $30,000. For members 50 years and over is $35,000. ^ up to 30% for those earning $300,000 or more p.a.
Contributions cap – case study
Meet Julie
• 45 years of age • earns $70,000 p.a.
• wants to start saving for a comfortable retirement.
Contributes: 1. SG (9.5% i.e. $6,650) 2. 50% of Concessional Contributions cap ($15,000) 3. 100% of Concessional Contributions cap ($30,000)
Contribution Caps – case study
Assumptions: CGT and income tax is taken into account at all times. CGT discount for 12 month ownership applied (33.33% in super fund). All earnings are reinvested (less tax for income). Tax rate inside super (including on contributions) is 15%. Returns from the portfolio are 8% (5% capital gain, 3% income). 20% of the income is franked.
Salary sacrifice – case study
Meet Carol
• 45 years of age • earns $70,000 p.a.
• wants to start saving for a comfortable retirement.
Salary sacrifice – case study
Salary sacrifice vs. investing after-tax money
• Carol has $5,000 gross salary p.a. to invest • If she takes $5,000 as cash (after income tax of 34.5%*) = $3,275 • If she salary sacrifices $5,000 into super (after15% contributions tax) = $4,250 • Difference is $975 more to invest • Remember, her investment earnings within super are taxed at 15%, instead of a marginal tax rate of 34.5%* outside super.
Result: In this example Carol can accumulate savings faster.
*This example assumes a marginal tax rate of 34.5%, however this may not be applicable to you. Please see your tax adviser for further information on how this impacts your individual circumstances.
Salary sacrifice – case study
Assumptions: For the purpose of this case study Carol’s marginal tax rate is 34.5% (including Medicare Levy and Temporary Budget Repair Levy). CGT and income tax is taken into account at all times. CGT discount for 12 month ownership applied (50% in personal name, 33.33% in super fund). All earnings are reinvested (less tax for income). Tax rate inside super (including on contributions) is 15%. Returns from the portfolio are 8% (5% capital gain, 3% income) both inside and outside super. 20% of the income is franked.
Salary sacrifice - things to remember
Salary sacrifice contributions count as income for the following measures: • Centrelink income-tested payments • Government co-contribution • Low income superannuation contribution • selected tax offsets • family tax benefit (FTB) Part A & B • personal deductible contributions to super • Medicare levy surcharge (income threshold).
< What if you’re ‘self employed’? Personal deductible contributions slides >
Strategy – personal deductible contributions
Obtain a tax deduction on your personal contributions to super.
What is it?
• By making a personal contribution to super, you may be able to claim a tax deduction in your tax return, if you meet the eligibility requirements. Any personal contribution you claim as a tax deduction will be taxed at 15% in the superannuation fund.
How can you benefit?
• You grow your retirement savings faster.
Strategy – personal deductible contributions
Who can this strategy work for?
• Retirees, self-employed, homemakers or unemployed persons who: – Earn less than 10% of their income from employment – Are under age 75 – Are eligible to contribute to superannuation * Contributions may be received on or before the 28th day of the month following the month the member turns 75
Case study 1 – personal deductible contributions to reduce tax
Meet Helen
• 43 years of age • Self-employed florist earning $75,000 p.a.
• Marginal tax rate of 34.5%* • Makes a $25,000 personal deductible contribution into super and submits a notice of intent to claim a tax deduction.
Helen’s super contribution is taxed at 15% in the fund, not her marginal tax rate of 34.5%*. Helen achieves $4,875 in additional retirement savings (19.5%* of $25,000)
*Includes Medicare levy and Temporary Budget Repair Levy
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Case study 2 – personal deductible contributions to reduce CGT liability
Meet David
• 61 years of age • Self-funded retiree • Sold an investment property for $250,000 and made a $25,000 assessable capital gain • Marginal tax rate is 34.5%* • Contributes $25,000 into super • Benefits by offsetting his CGT liability as well as growing his super.
*Includes Medicare levy Temporary Budget Repair Levy
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Case study 2 – personal deductible contributions to reduce CGT liability
Assessable capital gain Less deduction for super contribution Taxable capital gain Less tax payable at 34.5% Less 15% super contributions tax
Net amount Before strategy
$25,000 $0 $25,000 $8,625 n/a
$16,375 After strategy
$25,000 $25,000 $0 n/a $3,750
$21,250
By making the deductible contribution David has achieved $4,875 in additional retirement savings.
Note: this example does not consider CGT discount eligibility
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Strategy – personal deductible contributions
Tips and traps
• After the end of the financial year, you should receive a letter from your super fund asking if you intend to claim a tax deduction for your personal contributions. Be sure to consult your financial adviser before replying.
• Alternatively, you will need to provide a tax deduction notice to your super fund before you withdraw, rollover or commence a pension.
• Ensure you have notified your super fund (and received acknowledgement) that you intend to claim a tax deduction for your personal contributions.
Strategy - personal deductible contributions
Things to remember
• Personal deductible contributions count as income for the following measures: – selected tax offsets – family tax benefit (FTB) Part A & B – Medicare levy surcharge (income threshold).
– Low income superannuation contribution
< Insurance through superannuation>
Insurance through super
• Purchasing life insurance through super may be a tax effective strategy.
• Did you know that most Australians are underinsured?
• Having sufficient life insurance cover is important so you and your family are protected if anything happens.
What is it?
This strategy involves holding your insurance through your super account and using your contributions or existing balance to pay for the premiums.
Strategy – insurance through super
How does it work?
Insurance can be purchased through a super fund with: • your existing super savings • your pre-tax income by having your employer make salary sacrifice contributions • your employer’s Super Guarantee contributions • personal contributions for which you intend to claim as a tax deduction (if you meet the eligibility requirements) • personal after-tax contributions.
Strategy – insurance through super
How can you benefit?
• Top up your stand-alone insurance policies and increase your overall coverage.
• Premium may be cheaper as the super fund is buying the insurance ‘in bulk’.
• You may receive a Government co-contribution if you fund the cover by making after-tax contributions.
• Your qualifying dependants can receive tax-free super lump sum benefit payments if you, the insured, pass away.
Strategy – insurance through super
Who can this strategy work for?
Insurance through super is suitable if you: • want to tax-effectively hold insurance • want your qualifying dependents' to receive a tax-free super lump sum benefit payments if you pass away • have restricted cash flow and want to use your accumulated super balance to pay for premiums.
Insurance though super - case study
Meet Tim
• 37 years of age • Earns $85,000 p.a. • Is currently paying $1,200 p.a. in insurance premiums for Death & TPD Cover outside super • His spouse, Anita, is listed as sole beneficiary
Insurance though super - case study
Let’s compare paying for this insurance premium outside super versus inside super: Premiums owed Amount of pre-tax income required Tax paid Savings
Outside super
$2,000 $3,279* $1,279
$0 Inside super
$2,000 $2,000 $0
$1,279
Tim saves $1,279 per annum * at a marginal tax rate of 39% (including Medicare levy and Temporary Budget Repair Levy)
Insurance through super considerations
• How will your retirement funds be impacted with super monies used to fund insurance premiums?
• Is it enough?
• Is the structure right?
• Who will be the beneficiaries?
• How will the benefits be taxed (e.g. income stream vs lump sum benefit payments)?
• Does the insurance complement the intentions of your Will?
• Understand the role of the trustee
Earn an extra 50% return on your investment.
Strategy: Government co-contributions
Boost your retirement savings with help from the Government.
What is it?
The co-contribution scheme is where the Government may contribute towards your super if you are a low-to-middle income worker and make a voluntary after-tax contribution for which a tax deduction has not been claimed.
Strategy: Government co-contribution
How does it work?
You may receive 50c for every $1 of after-tax money you contribute to your super, up to a maximum $500 for the 2014/15 financial year.
This is a great incentive for you to contribute to your super.
Income
$34,488 or less $37,488
Maximum co-contribution
$500 $400
Contribution required to receive maximum co-contribution
$1,000 $800 $40,488 $43,488 $46,488 $49,488 or more $300 $200 $100 $0 $600 $400 $200 $0
Strategy: government co-contribution
Who does this strategy work for?
You may be eligible if: • you earn at least 10% of your total assessable income (plus reportable fringe benefits and reportable employer super contributions) from employment or your own business • your total income is less than $49,488 for 2014/15 financial year.
• you are under 71 years of age as at 30 June 2015 • you haven’t held a temporary resident visa at any time during the income year • you lodge an income tax return.
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Non-concessional contributions cap
• An annual non-concessional contributions cap applies each financial year. The non-concessional cap is currently $180,000 for 2014/15 and will be indexed over time. • If you are under 65 years of age on 1 July of the financial year, larger contributions of up to $540,000 can be made by bringing forward two years’ contributions caps. The bring-forward is automatically triggered when your after tax contributions are more than $180,000 in a particular year • Contributions in excess of the cap will attract excess contributions tax of 49%*.
* The Government proposes to introduce the option to withdraw excess non-concessional contributions and any associated earnings
Government co-contribution – case study
Meet Alyssa
• 42 years of age • Earns $30,000 p.a.
• Wants to take advantage of Government co-contribution scheme • Makes after-tax contribution of $1,000 to her super • She is eligible to receive a Government co-contribution of $500 (in 2014/15).
< Spouse contributions slides >
Strategy: spouse contributions
Contribute to your spouse’s super, for a tax-effective way to save for retirement together.
What is it?
This strategy allows you to make after-tax contributions to your spouse’s super fund to boost their retirement savings.
Strategy: spouse contributions
How does it work?
• If your spouse’s assessable income (plus reportable fringe benefits and reportable employer super contributions) are $10,800 or less, you receive an 18% tax offset (up to a maximum of $540) on the first $3,000 of your after-tax spouse contribution.
• The tax offset reduces if you spouse’s income is greater than $10,800 and cuts off once your spouse’s income reaches $13,800.
• You must both be Australian residents for tax purposes.
Strategy: spouse contributions
How can you benefit?
• Receive a maximum $540 tax offset (18% on the first $3,000 you contribute).
• Grow your retirement savings together as a couple.
• Build wealth even if one spouse isn’t working since earnings within super are generally taxed at a lower rate than investments outside super.
Who does the strategy work for?
Generally, you can make spouse contributions on behalf of your spouse if: • they are under 65 years of age or • they are between 65 to 69 and have been gainfully employed for at least 40 hours over 30 consecutive days during the year.
Spouse contributions – case study
Meet Craig and Angela
• Craig, aged 35, earns $120,000 p.a. and has reached his concessional contributions cap • Angela, aged 35, homemaker earning $8,000 p.a.
• Craig invests a further $3,000 after tax money into Angela’s super • Result – Craig receives a $540 tax offset Craig and Angela are tax-effectively saving for their retirement.
< Contributions splitting slides >
Strategy: contributions splitting
Splitting super contributions is another way to tax-effectively save for retirement.
What is it?
• This strategy allows you to split your employer super contributions and personal deductible contributions with your spouse.
Strategy: contributions splitting
How does it work?
• Works according to ‘annual split’ model.
• Need to apply to your super fund to request split.
• You can only split up to the lesser of your concessional contributions cap, the taxable component of your account and 85% of the concessional contributions.
How can you benefit?
• Earlier access to super benefits and tax concessions.
• Tax-effective funding of life insurance through super for your spouse.
Strategy: contributions splitting
Who does the strategy work for?
Contributions splitting is suitable if you: • want to boost your spouse’s super savings • have a spouse who is eligible to receive super contributions • have a spouse who will reach preservation age or age 60 sooner.
Strategy: contributions splitting
Rules
Be aware that contributions splitting: • is not offered by all super funds • can only be made in the favour of a spouse • is subject to preservation rules and contributions cannot be generally accessed until a condition of release is met • applies to employer super contributions and personal deductible contributions.
Contributions splitting – case study
Meet Erica and Steve
• Both 55 years of age • Erica earns $110,000 p.a. and Steve is retired • Over last few years, Erica has salary sacrificed contributions into super and accumulated an extra $250,000.
• Erica wants to retire and use $250,000 to purchase a property.
• First $185,000 is tax-free but the other $65,000 is taxed at 17% = $11,050.
Contributions splitting – case study
• If Erica and Steve built up their accounts evenly by splitting the contributions ($125,000 in each account), and they both had access to the low rate cap, there would be no tax on the withdrawal from each account.
This strategy provides them with an additional $11,050 and give them more money to pay for the property purchase.
< Transition to retirement slides >
Strategy: transition to retirement
Ease into retirement or build your retirement benefits by commencing a transition to retirement (TTR) pension.
What is it?
• TTR allows you to access your super benefits, once you have reached preservation age, in the form of a income stream.
• You don’t have to retire or reduce your hours of work.
Strategy: transition to retirement
How does it work?
• • Here are some ways you can use TTR to your advantage: Maintain your current lifestyle and spend fewer hours at work – by drawing from your accumulated super benefit through a TTR pension.
Work the same hours and boost your retirement savings and/or current income – by setting up a TTR pension and salary sacrificing extra amounts to your super.
Strategy: transition to retirement
How can you benefit?
• Maintain income level through a combination of salary and pension income using a salary sacrifice and pension strategy • No tax on investment earnings in pension phase, compared to a maximum rate of 15% tax on investment earnings in accumulation phase.
• Salary sacrifice is a tax-effective way to save more.
• Receive 15% tax offset on taxable component of income payments under 60 years of age.
• Receive tax-free pension payments from 60 years of age.
Strategy: transition to retirement
Who does the strategy work for?
TTR is suitable if you: • have reached preservation age • want to continue working • want to reduce your working hours and supplement your reduced salary by drawing from a TTR pension.
Transition to retirement – case study
Meet Patrick
• 60 years of age • Earns $58,800 p.a. ($47,085 after tax) • Has $400,000 in super • Wants to boost retirement savings and gain tax advantage by salary sacrificing and maintain his take home pay.
Transition to Retirement – case study
Let’s look at how he can do this through a TTR strategy: • Patrick salary sacrifices $29,414* into his super (taxed at 15% inside super rather than at marginal tax rate) • He transfers his $400,000 preserved super entitlements into an account-based TTR pension • To help his cash flow, he will receive tax-free pension payments of $20,000 p.a.^ • Combined with his remaining work salary, this allows him to increase his income level.
*Concessional contributions cap $35,000
less
9.5% SG contributions of $5,586 ^ Assuming no untaxed component.
Transition to Retirement – case study
Here’s how it works:
Cash flow impact
Original salary Salary sacrifice contributions Transition to retirement pension Total income Taxable income
less
income taxes Cash flow
Current position ($)
58,800 (0) 0 58,800 58,800 (11,505)
47,295 With strategy ($)
58,800 (29,414) 20,000 49,386 29,386 (2,058)
47,328
This strategy maintains Patrick’s income while boosting his retirement savings by $7,852 after year one.
Assumptions: No taxation deductions have been claimed. The super guarantee is assumed unchanged at 9.5% of the pre-sacrificed salary. 2014/15 marginal tax rates and offset thresholds used (includes low income tax offset, mature aged worker tax offset and pension tax offset only). Tax free ratio is 100%. 6% return on superannuation accumulation interest, pension returns grossed up based on average tax rate in accumulation of 10%. This information is provided for illustrative purposes only.
< Options once you’ve reached your contributions caps >
Options once you’ve reached your contributions caps
What options are available?
• If non-concessional contributions cap is reached, concessional contributions such as salary sacrifice may be available.
• If concessional contributions cap is reached, non concessional contributions using after-tax money may be appropriate.
• You can also consider non-super strategies: – such as an investment bond, where earnings are taxed internally at a rate of 30%, or – a unit trust investment, where earnings are taxed at marginal rates.
Options once you’ve reached your contributions caps
Who can these strategies work for?
People who: • have maximised your contribution caps • have a marginal tax rate of 30% or above, or • are looking for wealth accumulation strategies with access to capital.
Consolidating your super
Benefits of consolidating your super
• Save on fees – one fund means one set of fees.
• Simplify - keep better track of your investment when it’s in one place.
• By having all your super together it’s easier to plan for a future that includes a comfortable retirement.
Final thoughts
• Many Australians may not be saving enough to achieve a comfortable retirement. Super is a primary source of income for most Australians in retirement.
• Don’t rely on the Government pension. The max pension rate per fortnight for a single person is approx. $854.30 and $1,288.00 for a couple.
1 • Super is a tax-effective savings plan to help you save more for your retirement. Investing more today can make a significant difference to your savings and lifestyle in retirement.
1 These figures are effective from 20 September 2014.
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General disclaimer
This material is current as at October 2014, but may be subject to change. It has been prepared without taking into account your objectives, personal financial situation or needs. <
This information is of a general nature and has been prepared without taking account of your personal needs, financial circumstances or objectives. Before acting on this information you should consider whether the information is appropriate for you having regard to your personal needs, financial circumstances or objectives. Please see your adviser for advice taking into account your individual circumstances. This is our interpretation of the law and does not represent tax advice. Before making any financial decision, <
The case studies are hypothetical and are not meant to illustrate the circumstances of any particular individual .