Saving for retirement is becoming more flexible, but timing is still everything.
June is a busy period to put tax-saving tactics into effect before the end of financial year, and superannuation is widely seen as the best tool to use.
Deakin Business School associate professor Adrian Raftery said a favourite strategy of pre-retirees was “whacking as much money as possible into super”.
“The superannuation environment is taxed at 15 per cent versus potentially 47 per cent (outside super),” Dr Raftery said. Once you retire and switch to a super pension, there’s zero tax payable.
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Money goes into super through one of two ways: concessional (pre-tax) contributions such as salary sacrifice or compulsory employer payments, and non-concessional contributions made from money already taxed, such as wages or savings.
Concessional contributions are capped at $25,000 annually, but Dr Raftery said a new rule change would allow catch-up contributions to be made from July 1. Super savers with balances below $500,000 will soon be able to inject unused concessional contributions from previous financial years.
This follows another recent rule change allowing flexibility for workers to make personal concessional contributions at any time rather than being limited to salary sacrifice.
However, salary sacrifice is still powerful because it’s enforced savings.
“Ask most people if they have $25,000 sitting around and they will struggle to find that,” Dr Raftery said. “If you do salary sacrifice during the year it’s a lot easier.”
Non-concessional contributions are capped at $100,000 annually, and people can bring forward two years of future contributions to deposit a total of $300,000 in a year — perhaps from the sale of an investment property or similar.
“Leading into retirement you can do it in a way to maximise the amount you can put in,” Dr Raftery said. For example, people could hold off making maximum deposits until the final year before they retired, which would allow them to inject $300,000 in that final year, he said.
MLC’s latest Wealth Index found that people approaching retirement are anxious about the value of their homes, investment properties and other investments.
It found many don’t believe they will have enough wealth to live the lifestyle they want. This makes it important to maximise tax benefits.
MLC Technical Services manager Jenneke Mills said personal tax-deductible contributions to super could boost retirement savings and save tax.
“When selling shares or property, consider contributing some of the sale proceeds to super to help save for retirement, and manage some capital gains tax that may be payable,” she said.
“Some investments that you may own in your own name, such as shares or units in a managed fund, can also be owned in superannuation, resulting in more tax concessions.”
Retirement saving strategies should not be restricted to superannuation. Ms Mills said there could be tax-friendly options around investing in a spouse’s name or a trust structure for family members.
“Financial advice could help to determine what strategies are appropriate for you,” she said. “Depending on what strategy you’re considering, you may also need to engage a solicitor or tax accountant.”
Originally published as Turn your super into a big tax cut