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Maximising retirement savings

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For most people, superannuation is the “go-to” preferred structure for retirement savings. It is convenient, tax-advantaged and most superannuation funds offer a wide range of investment options enabling their members to structure their savings in a manner they find most comfortable.

However, superannuation has its limitations.

Today, I will deal with one.

Before 1 July 2020, to be able to make a voluntary contribution to super beyond their 65th birthday, a person had to have met a “work test”.

This work test is met when a person is employed or genuinely self-employed for a period of at least 40 hours, worked within a period of 30 consecutive days, in the financial year in which they intend to contribute. Once a person turns 75, even though they may continue to be gainfully employed – as an increasing number are these days – they are unable to make voluntary contributions.

From 1 July 2020, the age limit at which personal contributions can be made without meeting the work test was increased from 65 to 67. This measure was designed, at least in part, to mirror the progressively increasing qualifying age for the age pension.

The age limit for making contributions to super also affects a person’s ability to access the “three-year bring forward rule”.

The three-year bring forward rule applies to personal (non-tax deductible) contributions a person makes to super. These are referred to as non-concessional contributions.

The current annual limit or “cap” on non-concessional contributions is $100,000 per year.

However, provided a person’s total superannuation balance (the total of all money a person has in super at the end of the previous financial year) is less than $1.4m, they can bring forward their non-concessional contributions for the current and next two financial years and make non-concessional contributions of up to $300,000 in a single year. (A person is unable to make any non-concessional contributions if their total superannuation balance exceeds $1.6m).

When a person makes a non-concessional contribution of more than $100,000 in one financial year, they are said to have “triggered” their three-year cap. This means that the maximum they can then contribute over the course of the next two financial years is $300,000, less the amount contributed in the first year.

For example, if a person makes a non-concessional contribution of $170,000 in 2020-21, they have triggered their three-year bring forward cap. The maximum that can then be contributed in 2021-22 and 2022-23 is $130,000 in total.

On the other hand, if they contributed $300,000 in 2020-21, they are unable to make any additional non-concessional contributions until 1 July 2023.

To be able to take advantage of the three-year bring forward rule, a person must be aged 64 or younger at the start of the financial year in which they intend to contribute.

At present, a person may make contributions to super up until they turn 67 without having to meet a work test. However, if a person wishes to maximise their non-concessional contributions by using the three-year bring forward rule, they must have been 64 or younger at the beginning of the financial year.

When seeking to maximise retirement savings through super, timing is critically important.

 

Source: Peter Kelly | Centrepoint Alliance

Age Pension – not all assets are created equal!

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Your age pension entitlement can be affected by your assets, whether you own your home, which is an exempt asset (homeowner), are renting (non-homeowner), and if you are single or a member of a couple. The following table provides an overview of the current asset thresholds and limits as at November 2019.

Assets Test threshold for the full age pension

Status Homeowners – assets must be less than Non-homeowners – assets must be less than
Single $263,250 $473,750
Couple $394,500 $605,000

Assets Test upper limits

Status Homeowners – to receive a part pension, assets must be less than Non-homeowners – to receive a part pension, assets must be less than
Single $574,500 $785,00
Couple $863,500 $1,074,000

 

Here are ten things to consider when you do apply for your age pension.

1. Be aware that the value of your household contents, including your motor vehicle and personal effects, is ’fire sale’ value – not the insured value or the replacement costs. The difference in the two amounts can be substantial and can have a considerable effect on your entitlement. For example, the insured value of your home contents could be $80,000 as opposed to a fire sale value of $10,000. The difference in the two asset valuations could equate to $210 per fortnight in extra age pension just by ensuring that the fire sale valuation is used.

2. Superannuation in accumulation held in a partner’s name who is under pension age is not an asset and not assessable for the purposes of the assets test when calculating your age pension entitlement.

3. Shifting assets between partners is not seen as gifting.

4. Lifetime annuities with a nil residential capital value can be very effective in increasing a person’s entitlement under both the assets test and the income test.

5. A funeral bond up to the value of $13,250 is an exempt asset. For a couple purchasing one each, the total value for an exempt asset is $26,500.

6. Pre-paid funeral expenses and burial plots are also exempt, subject to a couple of conditions – the monies cannot be refunded, there is nothing more to pay and it is a contracted payment.

7. Your home and the – (maximum of 2 hectares) land (curtilage) surrounding your property regardless of the value are exempt from the assets test.

8. Investment properties are an asset which can be reduced by the mortgage secured against the investment property. If the mortgage is secured against your own home, it will not reduce the value of the investment property.

9. Loans to family members (children) paying no interest, which you may not see as an asset, are considered an asset according to the social security legislation. Depending on the amount of money lent, this arrangement can have a detrimental effect on your entitlement, so be very careful before you agree to lending any money to family members.

10. Selling an asset to a family member for less than what it is worth can be viewed as a gift, so again be very careful. Gifting any amounts to your children in excess of $10,000 can have a negative effect on your age pension entitlement.

 

This is certainly not a comprehensive list of considerations and pitfalls, but it is an overview of the more common issues which do arise.

Applying for an age pension when the time comes can be a very daunting proposition.

If you are in doubt about any of the questions or the information you have supplied, make sure you talk to an expert who understands the forms and what is required so that you are able to claim your maximum entitlement.

 

 

Source:  Mark Teale | Centrepoint Alliance

Important changes to Superannuation

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Australian employers are obliged to make minimum contributions to superannuation (super) for their employees. This is known as Super Guarantee (SG).

Currently an employer is required to contribute 9.5% of their employees’ salary (based on their Ordinary Time Earnings or “OTE”) to a super fund. Contributions must be made at least quarterly, by 28 January, April, July and October each year.

Employees can ensure their super guarantee contributions are being made in a correct and timely manner by checking their My.Gov account or with their super fund.

There are two important changes that will be affecting super guarantee contributions from
1 January 2020 and while these changes won’t affect everyone, it is good to be aware of what these are.

With the passing of the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Bill 2019 (Cth) on 22 October 2019, employers will no longer be able to offset their Super Guarantee obligations against contributions made to super under a salary sacrifice arrangement.

Where a salary sacrifice arrangement is in place, future super guarantee contributions will need to be calculated on an employee’s salary before the salary sacrifice contributions are deducted.

Change 1: Offsetting Super Guarantee
A salary sacrifice arrangement is a voluntary agreement where an employee chooses to forego part of their salary and have their employer contribute the foregone portion to super instead. This is a popular tax planning strategy as the amount contributed to super is taxed at a maximum rate of 15%, rather than at the employee’s marginal tax rate, as would be the case if it was paid as salary.

The downside of this is that a contribution made under a salary sacrifice arrangement is regarded as an employer contribution and can be used by the employer to offset their obligation to make further super guarantee contributions.
For example, if we consider an employee who earns $100,000 per annum, their employer is required to contribute $9,500 to super.

However, if that same employee asks their employer to salary sacrifice $10,000 of their salary to super, they will receive a salary of $90,000 and the foregone $10,000 will be contributed to super on their behalf.

The employer still has an obligation to contribute 9.5% of the new salary of $90,000 to super ($8,550). But, as the employer has already contributed $10,000 to super under the salary sacrifice arrangement, there is no need for the employer to actually contribute the additional $8,550 to super for the employee. Under this arrangement, the employer wins and the employee loses.

From 1 January 2020, employers will no longer be able to use salary sacrificed contributions to meet their super guarantee obligations.

Change 2: Calculating Super Guarantee contributions
At the present time, an employer can calculate their super guarantee contributions on the reduced salary after deducting salary sacrifice contributions from 1 January 2020 this will no longer be the case.

Turning back to our example, currently an employer is only required to base their super guarantee contributions on the reduced salary of $90,000.

From 1 January 2020, super guarantee contributions must be calculated on an employee’s ordinary time earnings before the salary sacrifice contributions are deducted. Once again, turning back to our example, future super guarantee contributions will be based on $100,000, rather than $90,000.

While many employers have, in the past, calculated super guarantee on the pre-sacrifice salary, and have not offset their super guarantee contributions with salary sacrifice contributions, the new legislation provides clarity and certainty.

Readers are encouraged to take an active interest in their super and ensure their employers are paying the correct amounts on their behalf.

Even though your employer includes details of superannuation contributions on your pay slips, it is important to check and ensure the contributions are actually being made to your super fund.

If you are planning to review or establish a salary sacrifice arrangement, consider seeking advice from a financial planner. Contributing too much to super can result in having to pay more tax, and not contributing enough can impact your retirement income.

 

Peter Kelly | Centrepoint Alliance

Is your employer paying the correct amount of super?

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There has been quite a bit of media focus about some employers either not paying or failing to pay the correct compulsory contributions to superannuation for their employees. So serious is the problem, new legislation has been tabled in parliament offering employers a one-off amnesty if they come forward and self-correct unpaid or short-paid contributions.

Despite the superannuation guarantee (SG) system being in place for almost 30 years (it was introduced back in 1992), an estimated 2.1 million employees are being underpaid their SG contributions by as much as $2.8 billion each year.

What is an employer required to pay?

Employers are currently required to contribute 9.5% of an employee’s salary to the employees nominated superannuation fund to comply with SG legislation. The Government is planning to progressively increase the contribution to 12% over the coming years.

The rules relating to SG are quite intricate, however when an employer fails to comply, they become liable to pay an SG charge.

SG contributions are based on an employee’s ‘ordinary time earnings’ and are payable on a quarterly basis. They must be paid by the 28th day of the month following the end of each quarter. So, for your June quarter salary, your superannuation must be paid by 28 July, and then 28 October, January and April respectively.

 

Exceptions and limits

There are very limited exemptions for payment of SG contributions. For example, an employer is not required to pay SG contributions for an employee in respect of those months an employee earns less than $450.

There is also an upper limit of ordinary time earnings on which SG contributions are payable. For the 2019/20 financial year, the limit is $55,270 per quarter. This is referred to as the “maximum contribution base”.

When an employee receives ordinary time earnings of more than $55,270 in any quarter, there is no obligation for their employer to make SG contributions for earnings that exceed that amount.

As a consequence, the maximum SG contributions an employer is required to make at law in 2019/20 is $5,293.40 per quarter.

 

Extra contributions

Some employers may pay more than 9.5%. That is dependent on the generosity of the employer and/or any obligations imposed under an employment contract or workplace agreement.

In situations where a person has two or more employers, and it is likely that their SG contributions may result in them exceeding their contribution cap of $25,000 in a year, recently passed laws allow the employee to opt-out of receiving some SG contributions. Readers who feel they may be affected should seek advice from their accountant or financial planner.

 

The SG for small business

One aspect of the SG often overlooked, is the fact that many small business operators regard themselves as being ‘self-employed’ and don’t believe the SG obligations apply to them, and to family members they may employ.

However, where a small business operates under a (private) company structure, the directors of the company are also regarded as employees for SG purposes. The business has an obligation to comply with the laws relating to the payment of superannuation contributions. However, with the extension of the Single Touch Payroll system to all businesses, the Australian Taxation Office (ATO) now has the tools available to more closely monitor an employers’ compliance with their SG obligations.

 

What can you do?

If you believe your employer has not been paying the correct level of SG contributions, you have two options:

  • you can approach your employer and ask them to make the necessary contributions, and/or
  • you can request the ATO to follow up unpaid contributions.

The compulsory superannuation system is an important part of Australia’s retirement savings landscape. It is important for employees to understand their rights in respect of superannuation contributions and take an active role in ensuring their employers are complying with the SG scheme.

 

Source:  Peter Kelly | Centrepoint Alliance

What is the cost of complacency when it comes to your Superannuation?

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Many Australians, in particularly the younger ones, are so totally disengaged when it comes to Superannuation that they are not aware of what super fund they belong to, how many accounts they have with different super funds and how their super is invested.

Do you fall into this category?
Disengagement with super is highlighted by the fact that in 2017/18 the Australian Taxation Office was holding around $17.5bn of lost superannuation. This was spread over $6.2milion separated accounts, with the largest single account being $2.2m for a New South Wales individual.

Even if you don’t have any lost super and know how much you have, there are other things you need to be aware of that can have a significant impact on just how much you will have in super when you reach retirement.

Things like, how your super is invested, and the amount of fees you are paying can seriously impact how comfortable your retirement will be.

For many Australians, their compulsory superannuation contributions are being paid to a super fund nominated by their employer and is being invested in accordance with the funds’ default investment option. The super fund selected, and the investment option may be totally inappropriate for an individual member of the fund.

When we talk of investing money, we must take into account what is referred to as our “risk profile”. That is, are we someone who doesn’t like to take unnecessary risks with our money and therefore may be a conservative investor, or are we someone you is prepared to take considerable risk to see our super nest egg grow and therefore be a “growth focused” investor, or do we sit somewhere in the middle ground and are a “balanced” investor.

Many default superannuation funds have a balance investment of option as their default. But what is a balanced fund for one super fund may mean something entirely different for another super fund.

Being a member of a default balanced fund may be fine for someone who is willing to take some, but not a lot of risk in the manner in which their super is invested, but it may be totally inappropriate for a member who is approaching retirement and may feel more comfortable with a less risky approach to their investments, or for a younger member who has many years to ride out the ups and downs of the investment markets in exchange for a potentially higher return.

Selecting an appropriate investment option for their super becomes an important consideration for members of superannuation funds. An additional 1% or 2% annual investment return on superannuation savings can make a difference of hundreds of thousands of dollars for a young superannuation fund member, over their working life.

Another aspect of super that cannot be ignored is the fees being charged by super funds to manage your money. While fees for many super funds have been reducing over recent years, there are still many super funds that are charging fees in excess of those offered by their peers.

Just as an additional 1% or 2% of additional investment return can have a positive impact of a superannuation balance, paying higher fees than necessary can have a significant negative impact on superannuation savings over the course of a working life.

As a member of a super fund, you need to be aware of what is happening with your super.

Here are some questions to consider:

1. How many super fund accounts do I have? If more than one, should I consolidate them into one fund? This can save on fees – but check that you are not losing valuable insurance cover first.

2. Do I have any lost super? This can be checked by logging in to your MyGov account or asking your existing known super fund to check for you.

3. What fees am I paying for my super? In particular, am I paying fees for services I don’t need?

4. How is my super invested? Is it appropriate for my life stage and my own attitude to risk?

5. How has my super fund performed over time? Don’t simply keep chasing last year’s best performing fund but look to a super fund that provides consistent returns over a longer period and charges a fair fee for the services they provide.

For many people, analysing the appropriateness of their super fund will not be an easy task. However, help from a suitably qualified financial adviser to ensure you are, or get you back on the right track may be money well spent.

 

Source: Peter Kelly | Centrepoint Alliance