diy super
Story sam henderson
Boost
your
super
k
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There are smart strategies
that can supercharge your
retirement savings
70 Money May 2012
ey strategies that an
SMSF expert adviser might recommend can help you reduce
your tax and boost your super.
Following these strategies can
make a huge difference to your retirement
savings, adding hundreds of thousands of
dollars to the end result. And don’t discount
them if you are under 50 – many strategies
can be used in your 30s and 40s. The earlier
you start in super, the better off you will be.
So many times I hear clients say they wished
they had known earlier how to use the benefits
of an SMSF. So don’t delay – do it now!
Some employers don’t have a choice of
fund and you may have to salary sacrifice
into a fund stipulated in your employment
contract; however, you may be able to sweep
that money out regularly and transfer it into
your SMSF. If this is not possible, you may
have to wait to retirement or resignation to
roll over your super.
That is unlikely unless you have definedbenefit super. Even if you do, you will have a
member portion in your super that should be
available for rolling into your SMSF.
Salary sacrifice
If you earn less than $31,920 and you make a
non-concessional superannuation contribution to super of $1000, the government will
give you an extra $1000 in your super fund
when you complete your personal tax return.
One of the first strategies you should implement is salary sacrifice. You put a portion of
your before-tax salary into your super fund
as a concessional contribution instead of taking it as part of your monthly pay. Your salary
sacrifice contributions will be taxed at 15% by
the super fund and not in the hands of your
employer. The money is sacrificed because
you can’t touch it until you meet a condition
of release. The idea is that you put in more
than your super guarantee amount of 9% a
year to boost your balance and you get the
added benefit of saving tax.
Given that most full-time workers earn more
than $37,000 a year, they will pay more than
15% tax on their earnings. By putting money
into your super and paying the 15% contributions tax, you will be better off by up to 66%
if you are on the highest marginal tax rate of
45%. If you are paying 30% tax (income greater
than $37,000 a year), you will be better off by
50%. So salary sacrifice makes sense. (Note
that tax brackets will change over time.) Often
increasing your salary sacrifice doesn’t greatly
affect your take-home pay, owing to the tax
savings, but that will depend upon the level
at which you salary sacrifice.
It’s important to understand your cash flow
properly so you can accurately work out how
much salary sacrifice you can afford. If you
do get it wrong, you can change the amount
fairly easily (ask your employer about how
often you can change), so don’t worry too much
as it may require some playing around to find
the perfect amount to put away each month.
If you work for someone, have a chat to
the payroll department or person to make
sure they are comfortable with how to make
your contributions; and make sure that you
have a choice of fund and they have your
SMSF details.
Co-contributions – free money
key points
These strategies will supercharge your
SMSF and help you retire with more money in your pocket!
• Salary sacrifice reduces income tax
and boosts your super.
• Co-contribution is money for nothing
from the government if you earn less than
$62,000.
• Transition to retirement is all about
trying to enhance your retirement savings
without too much financial pain.
• Account-based pensions are a truly
tax-free investment environment and the
reason you should buy assets inside of
your super fund – no income tax, no earnings tax and no CGT!
• Super splitting can even up member
account balances in your SMSF and protect your fund against prospective future
changes to taxes on higher balances.
• Constructing the right strategies
should come before choosing the right
investments. One of my favourite pieces
of advice to clients is “strategy first, product second”.
• Remember that borrowing money will
increase risk, but that risk can be substantially reduced if the debt is reduced. You
can do this by maximising your annual
tax-effective concessional superannuation contributions.
• Use super to build your investments and
reduce your income tax.
That’s a 100% return on your money – guaranteed! The co-contribution is perfect for parttime workers, including university students
with part-time jobs, apprentices and working
mums. If you don’t have $1000 spare, you can
contribute less and still receive a bonus based
on the amount contributed.
For example, if you earn less than $31,920
and contribute $200, your super will get a
$200 payment from the government. The
amount due to you will reduce by 3.333¢ for
every dollar you earn over $31,920 up to a
maximum of $61,920, when you will no longer
be eligible for a bonus.
If you earn more than $31,920 and less
than $61,920 you will receive a part bonus.
For example, if you contribute $1000 and
earn $50,000, you will receive around $400;
if you earn around $59,000, you will receive
around $100. It is proposed that the rate for
the co-contribution will increase over time
for the next few financial years.
Please note that while the above information
is relevant until June 30, 2012, there have been
some changes. It is proposed that from July
1, 2012, the co-contribution will be reduced
by 50% from $1000 to $500.
An additional bonus will be given to superannuants in the form of an up-to $500 rebate
on superannuation contributions tax for those
with taxable income under $37,000pa. This is
similar to the co-contribution for low-income
earners. The co-contribution will be wound
back and the upper limit for eligibility will
fall from $61,920 to $46,920.
A good strategy for parents to encourage
young working-age children to contribute to
superannuation is to match their co-contribution. For example, suggest to your kids that if
they put $500 into their super, you will match
it with $500, and then they will receive the
full co-contribution from the government of
$1000. Strategies like these can help to build
superannuation awareness for young people
and start their retirement savings as early
as possible.
Transition to retirement
A transition to retirement income stream
(TRIS) is a superannuation pension you can
set up while you are still working. You can use
the income stream from the TRIS to subsidise
your work income while you increase your
concessional contributions to super, paying
just 15% contributions tax up to $50,000 a
year, instead of the 30%, 37% or 45% tax rate
on your normal pay. It’s like recycling your
Money May 2012 71
diy super
money to reduce your tax by drawing down
on your super and salary sacrificing simultaneously. The government allows this because
they want you to be at least partly self-funded
in retirement.
To be eligible to commence a TRIS you need
to be over 55 and less than 65. Once you reach
65, you have met a normal condition of release
and can commence a full account-based pension. If you have a TRIS, you can draw only
between 4% and 10% of the account balance
at July 1 (or set-up date) each year, and you
cannot withdraw any lump sums beyond the
10% maximum.
If you have an SMSF you need to make sure
your trust deed allows for TRISs and, if not,
you need to update your trust deed (which
will cost around $250 to $500). You will also
need to ensure that you have enough cash
inside your fund to pay your pension.
Essentially, your fund will be split into two
portions: a pension portion (no earnings tax
or CGT) and an accumulation portion (continues paying 15% contributions and earnings
tax). Because of this, you may need an actuarial certificate (costing upwards of $200)
each year to ascertain the member balances,
pension balance and accumulation portion.
This will help your auditor and ensure that
your fund remains compliant.
Also note that you cannot contribute money into the pension portion of the fund, only
into the accumulation portion, which is why
we need to keep this account operational.
There are tax benefits in moving most of the
assets into the pension phase, owing to the
tax concessions afforded to this part of the
fund, including no liability for earnings tax
and no capital gains tax. The accumulation
portion continues to attract 15% contributions
tax, 15% earnings tax and capital gains tax of
10% if assets are held for more than 12 months
(15% on assets held for less than 12 months).
People who don’t need the cash flow or
to put in the full $50,000 super contribution
should understand that all investment earnings in the TRIS account are free of capital
gains tax, income tax and earnings tax.
So even if you don’t need the cash flow from
the TRIS, it can be a good idea to withdraw it
and contribute it back into your or your partner’s super fund as a non-concessional contribution (up to $150,000 a year, or $450,000
under the three-year averaging rule).
For even higher-net-worth clients, such as
professionals, self-employed people or toplevel executives, it may not be worth drawing
a TRIS, but in most cases a TRIS will reduce
72 Money May 2012
earnings tax and capital gains tax to zero, and
boost your super. Taking a TRIS may also be
an opportunity to build your partner’s super
if they have a smaller balance than you.
It’s a good idea in these circumstances to get
expert professional advice and get someone to
talk through the opportunities and do some
calculations for you so you can accurately
determine the benefits of a TRIS.
Account-based pensions
An account-based pension is an income stream
established from your super account once
you reach a full condition of release – such as
retirement after reaching 55, or reaching 65
even if you are still working. Key benefits are:
• You pay no capital gains tax on the sale of
assets in your super fund whether you are
under or over 60.
• You pay no tax on the investment earnings in
your pension account whether you are under
or over 60 in an account-based pension mode.
• You can take out lump sums of any amount,
whenever you want.
• Your reversionary dependent beneficiaries can
receive your pension tax-free after your death.
• There is flexibility about the type of investments you can make.
• You pay no tax when you roll over your
super money from accumulation mode to
pension mode.
• Once you are over 60, all income from your
super is free of tax. Under 60 (55 to 59) your
super income will be subject to tax, but you
also receive a 15% rebate on your taxable portion so many people don’t pay tax even when
they’re under age 60.
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T
his is an edited
extract from
SMSF DIY Guide by
Sam Henderson
(RRP $34.95,
published by
Wrightbooks).
To win one of 10
copies, tell us in
25 words or less
your best tip for
boosting your super. Send your entries
to [email protected] or
SMSF DIY Guide, Money magazine, GPO
Box 3542 Sydney NSW 2001. Entries
close June 5, 2012.
In an account-based pension, you have to
draw at least a minimum 4% (3% in 2011-12)
of your account balance at July 1 or the anniversary of your set-up date every year.
You don’t have to put all of your money in
your super fund into the account-based pension account. You can leave some in accumulation mode, though you will need an
actuarial certificate to segregate your assets
if you do this.
You can go on contributing to your accumulation account while drawing an income
stream from your pension account. You can
also have multiple account-based pensions.
Super splitting
One of the super provisions the government
wants to introduce (it may be law by the time
you read this) is reducing the contribution limits for people who have more than $500,000
in their member accounts.
The problem for SMSF members is that
the average SMSF has $900,000 in the fund
and an average member balance of $450,000,
which is pretty close to the $500,000 limit.
Compare this with the average super fund
balance of around $77,000; the average man
currently retires with $150,000 and the average woman $75,000.
SMSFs have to manage their members’
balances to avoid possible future taxes and
restrictions on tax concessions. My advice is to
split super contributions and consider salary
sacrificing into your partner’s super account
if your account balance is close to $500,000
or even $450,000, and your partner’s balance
is significantly lower.
There are several other ways to even out
account balances, such as making nonconcessional contributions to your
partner’s account or, at retirement, withdrawing a sum and recontributing it
into your partner’s account to increase
the non-taxable portion of their member account.
If future governments reduce the tax
concessions available to holders of large
super balances, you know that you have
done what you can to reduce the damage of
unnecessary taxation in the future. While
the government has plans to reduce contribution limits, they may have other plans as
our workforce ages and tax revenue reduces.
Watch this space!
Sam Henderson is CEO and senior financial
adviser at Henderson Maxwell, an awardwinning boutique financial planning firm