Smart tax moves for those looking to retire

By Mark Chapman | H&R Block

What should I do to retire comfortably?

As we get older, more and more of us start to take planning for our retirement more seriously. With our system of compulsory superannuation, most of us have been saving for our retirement from the day we started work, but in our younger years, many people regard that 9.5% employer contribution to super as an annoying diversion of funds that would be better off in our constantly depleted bank account.

Attitudes change though as we move into our middle years and start to focus on the possibility that we might not have enough to live on in retirement. Recent statistics show that to enjoy a “comfortable” retirement, a couple will need a superannuation lump sum of at least $535,000, as well as a part Age Pension. For a single person, the equivalent figure is $490,000. Unfortunately, average superannuation balances at the time of retirement (assumed to be between 60 to 64 years of age) in 2013/2014 were only $292,500 for men and $138,150 for women – well short of the figures required to support that “comfortable” retirement.

So, as you enter your 50’s, what can you do to improve your retirement savings?

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Should I Salary Sacrifice Super?

A great way to boost your super is to salary sacrifice some additional contributions into your fund. This involves arranging with your employer for some of your pre-tax wages or salary to be paid into your super fund rather than to you. You will save tax and boost your super.

By ‘sacrificing’ some of your before-tax salary and putting it into your super fund, you get taxed at 15% on the additional contributions. If you normally pay income tax at a higher marginal rate than this, you will save tax. The higher your marginal tax rate, the greater the saving.

Note though, that if you’re looking to salary sacrifice, always enter into a formal agreement with your employer which includes the details in your terms of employment. This ensures your employer calculates their 9.5% super guarantee contribution on your original salary.

What I Need to Know About Making Additional Contributions?

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Concessional Contributions

The most common type of contributions to super are concessional contributions, so-called because they are taxed in your super fund at the “concessional” tax rate of 15% when paid in. The most common type of concessional contribution is the one your employer makes to your super fund out of every pay, at a rate of 9.5% of your earnings. Salary sacrifice contributions are also concessional as are contributions paid by the self-employed for which they have claimed a tax deduction.

At the moment, you can pay up to $30,000 in concessional contributions into your super fund each year (or $35,000 if you are aged 49 or over), so if your current contributions are less than that (and you can afford it), you should look to make some additional contributions to reach your cap, perhaps by salary sacrificing.

Note that from 1 July 2017, the amount of concessional contributions you can make will fall to $25,000 per year so if you have spare cash, it makes sense to take advantage of the more generous cap that exists until the end of this tax year.

Non-concessional contributions

Alternatively, you could look to make some non-concessional contributions. These are paid out of your after-tax income (so you don’t get any tax relief on the contribution) but they still make sense because once paid, the funds sit in the tax-advantaged environment of the super fund, where any income earned by the fund is taxed at just 15%.

At present, you can make up to $180,000 in non-concessional contributions in a single year or – if you haven’t made any such contributions in prior years – you can make a “catch-up” contribution worth up to three times the annual cap, or $540,000.

Again, the rules are being tightened from 1 July 2017. From that date, you’ll only be able to pay $100,000 per year in non-concessional contributions and nothing at all if your superannuation fund is over $1.6 million so, if you’ve got money to spare which you can afford to lock away in super until you retire, it pays to get in quick and take advantage of the current, more generous rules.

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Why Should I Combine Super Funds?

Very often, as people change jobs, they start a new super fund with their new employer. The result, by the time they reach middle age, is that they have a large number of super funds, each with a fairly small balance. Each of those funds charges fees which eat into the balance. Spreading your super across multiple accounts like that can, over time, cost thousands of dollars in excess fees; money which will not then be available to you in retirement.

If that sounds like you, it makes sense to combine your super funds into one. Doing that will reduce the fees and charges you suffer each year and give a boost to your retirement pot. There are no tax charges where you combine super accounts and it’s easy to arrange through your preferred super provider.

When Can I Retire?

You can retire whenever you like, but you won’t necessarily be able to access your super on tax advantaged terms (or at all, if you retire too early).

Generally, you can access your super tax free once you reach your preservation age and retire (or once you reach age 65, whether you retire or not). Your preservation age depends on how old you are:

Date of birth	Preservation age (years)
Before 1 July 1960	55
1 July 1960 – 30 June 1961	56
1 July 1961 – 30 June 1962	57
1 July 1962 – 30 June 1963	58
1 July 1963 – 30 June 1964	59
After 30 June 1964	60

As a general rule, you can’t access your super before your preservation age unless you have a terminal illness, become permanently incapacitated or suffer extreme financial hardship.