Despite the frequent legislative changes made to superannuation, it remains the retirement savings vehicle of choice for the majority of Australians, with a number of effective strategies that advisers can recommend to clients who are seeking to maximise their retirement savings. However, advisers need to be aware of the ongoing viability and appropriateness of these superannuation strategies and also question whether other avenues of investment for retirement savings would be more suitable for their clients’ individual circumstances and financial objectives.
Maximising superannuation savings
Superannuation remains the most commonly used vehicle or tax structure within which individuals accumulate their retirement savings.
For this reason, strategies which help maximise the effectiveness of contributions to, or even drawing monies from, superannuation are of considerable value to advisers and their clients.
When it comes to building retirement savings via the superannuation system, there are both benefits and drawbacks for individuals to consider in accordance with their financial needs and objectives.
Some of the key benefits of superannuation include the tax concessions available, the fact that it’s a compulsory retirement savings system for a majority of the Australian population, as well the Centrelink concessions for some individuals.
The main advantage of superannuation is the tax concessions available to individuals, where you get tax concessions for contributing into superannuation – that’s your SG contributions, your salary sacrifice contributions and your tax deductible contributions. When the money is in superannuation the Government taxes it concessionally, so the maximum tax rate you’ll pay is 15%. Now that’s lower than most marginal tax rates. If the funds are in accumulation phase it’s 15%. If the fund is in pension phase it’s tax-free and the tax-free status is what makes superannuation so attractive. If you’re aged 60 or over, pension payments are tax-free and that’s what everyone loves.
Enforced savings scheme
The compulsory nature of the superannuation guarantee (SG), which requires employers to make contributions on behalf of employers into their superannuation, is another benefit of superannuation in that it is an enforced retirement savings scheme for a majority of Australians.
Another aspect of superannuation is that the contributions that are made into the fund are subject to preservation. What that means is you can’t get the money out until you’ve satisfied a condition of release. For most people, that’s retirement. The effect of this is that ‘the contributions then really represent an amount of enforced savings.
The compulsory nature of the scheme, combined with the restrictions on access, have both acted to lift retirement savings which have historically been quite low for the average Australian. Many consider this one of the key strengths of our nation’s superannuation scheme.
Another advantage of superannuation that people often forget about, is the Centrelink concessions. If you’re under the pension age, superannuation is exempt provided it’s in accumulation phase. If you’re above age pension age and you’ve commenced a pension, the pension is generally assessable but the income that you draw down from that pension is concessionally assessed by Centrelink
If the fund is in pension phase it’s tax-free and the tax-free status is what makes super so attractive.
Some of the key disadvantages of the superannuation system for individuals saving for their retirement include the preservation rules and legislative restrictions.
The main disadvantage of superannuation is the preservation rules. What that means is you can’t get access to your superannuation until you meet a condition of release. For most people a condition of release is retirement. It can also be when you reach 65 years of age — that’s an automatic condition of release.
Considering there is continuous reform of superannuation, legislative risk is another disadvantage of the system as it is constantly evolves.
A key restriction these days are the caps on superannuation contributions above which penalty taxation applies and the changing face of superannuation. There is always that legislative risk of things changing — you don’t know what the rules will be in a couple of years time let alone at retirement.
If you are under 40 years of age and your retirement is a good 20–25 years away. Will superannuation look like it does now when you retire? Probably not. Will I be able to draw out a tax-free pension income from superannuation? Maybe not. And so the Government changes the rules which means that it may not look how it currently does.
Smart Superannuation Strategies
There is a range of valuable superannuation planning strategies financial advisers could advocate to their clients.
Effective superannuation strategies for advisers to consider for their clients include:
- Avoiding excess contributions tax
- Small business concessions
- Pre-retirement pensions
- Personal deductible contributions
- Salary sacrifice
- Insurance in superannuation
Avoiding excess contributions tax
Managing the amount of concessional and non-concessional contributions is critical to avoiding excess contributions tax. Failure to understand the rules or make contributions that inadvertently breach the caps are not sufficient enough reason for the ATO to exercise discretion.
Mismanaging even a small amount of contributions can result in incurring a large amount of contributions tax.
Case study 1: Avoiding excess contributions tax
Bill, age 61, owns and runs a small delivery business.
In February 2010 Bill sold an investment property for $700,000. After paying fees, expenses and a small loan, he has $600,000 available to invest. Bill sought advice from his adviser, who recommended making a non-concessional contribution on 1 June 2010 of $150,000 and another non-concessional contribution of $450,000 on 1 August 2010.
This strategy doesn’t result in Bill exceeding his non-concessional contribution cap, as he utilises his non-concessional contribution cap in the financial year ending 30 June 2010 and triggers the two year bring forward provisions with the $450,000 contribution on 1 August 2010. Bill is able to use the two year bring forward rules as he was under 65 as at 1 July 2010.
On 2 May 2011 Bill meets with his financial adviser. They agree to request a contributions assessment from the ATO to ensure that the contributions were correctly reported.
On 6 June 2011 Bill receives the pre-assessment from the ATO identifying that he has exceeded his non-concessional contribution (NCC) cap. A summary of the statement is below:
Non-concessional contributions 2009/10
1 June 2010 $150,000 (Personal contribution)
27 June 2010 $1,000 (Personal contribution)
Total non-concessional contributions $151,000
NCC cap $450,000
Amount remaining in NCC cap $299,000
Non-concessional contributions 2010/11
1 August 2010 $450,000 (Personal contribution)
Total non-concessional contributions $450,000
Amount remaining in NCC cap $299,000
Excess non-concessional contributions $151,000
Excess non-concessional contributions tax $ 70,215
During the course of the meeting, it came to light that Bill had responded to some marketing material issued by his superannuation fund in relation to personal contributions and the Government co-contribution. He had made a personal contribution to superannuation of $1,000 in the hope of receiving a Government co-contribution. However, Bill failed to recognise that this may result in exceeding his non-concessional contributions cap.
Is there a solution?
Bill’s financial adviser recommends that Bill lodges a notice of intent to claim a tax deduction for the $1,000 contribution made on 27 June. Bill is eligible to claim a tax deduction for personal contributions as he is self-employed. The superannuation fund is able to accept the notice as it is before the end of the following financial year when the contribution is made.
Upon Bill’s lodgement of his tax return, and declaration of a tax deductible contribution to superannuation, the ATO will re-allocate the $1,000 contribution to his concessional contribution cap.
Bill avoids paying excess non-concessional contributions tax of $70,215. In addition, he still may receive the Government co-contribution, subject to meeting the ordinary criteria.
For individuals with a self-managed superannuation fund (SMSF
), when it comes to avoiding excess contributions tax, they would generally only make contributions to that fund as this may make it easier to track the amount of contributions made, compared to those with more than one fund.
Contributions that are in excess of the fund-capped contribution limit can be refunded and this process can be relatively easy with SMSF
s as the members are also the trustees. However, he warned trustees need to understand how the rules operate in the first instance.
If you have a self-managed superannuation fund and you have an excess contributions tax issue, you need to consider the rules, and why I say that is, when you have a contribution into a retail fund or an industry fund, the trustees of the superannuation fund will generally consider if the super fund can accept the contribution in the first instance.
A 70-year-old individual who satisfies the work test and is eligible to contribute to superannuation is a great example of this. Rules are in place which are designed to prevent a superannuation fund accepting a lump-sum contribution in excess of the non-concessional cap, as well as processes to refund any excess amount within 30 days of the trustees becoming aware of the breach. However, problems do sometimes arise, particularly for SMSFs.
Let’s look at a scenario where a member makes a non-concessional contribution of $250,000 which is accepted by the superannuation fund. If the fund then reports that contribution to the ATO, the ATO will issue an ‘excess contributions’ assessment and the member will be hit with excess tax.
As a trustee of the self-managed superannuation fund hopefully they’ll get advice if they’re in that situation and hopefully the advice will show them that the fund should not have accepted the contributions in excess of the fund-capped contribution limit of $150,000 and the fund is able to refund the excess contribution amount.
The downside is that the member doesn’t have the money in superannuation so hopefully they can meet the work test the next year and make the contribution again.
Small business concessions
Another effective superannuation strategy to consider is the small business concessions which permit qualifying small business owners to disregard all or part of a capital gain resulting from the sale of certain assets.
These exemptions also permit contributions into superannuation above the ordinary non-concessional contributions thresholds.
Case study 2: Small business concessions and CGT cap contributions
Ron, age 63, is a small business owner who operates a printing business. The business has two locations, one in Sydney and one in Melbourne. In the last few years, Ron’s health has started to decline. This has driven him to downsize and sell the premises in Melbourne. Downsizing his operations permits him to reduce his workload from six to four days a week.
Ron purchased the property in Melbourne for $380,000 in 1990. He recently sold the property for $1,150,000. He understands enough about capital gains tax to work out that the gross capital gain is $770,000 and net capital gain after the 50% CGT discount that is applicable to individuals is $385,000. However, Ron is unfamiliar with the rules concerning the small business concessions.
Last year, his assessable income was $175,000 and he paid around $55,325 in tax. This year he expects his income to be around the same, even though business has slowed down.
Taking into account what Ron believes to be the assessable gain from the property, his assessable income would be around $560,000.
Ron believes the tax he would pay would be around $238,800 in tax (including Medicare and Flood levies), which is $183,475 extra in tax compared to last year.
This prospect has him quite concerned, and he decides to seek advice from his financial planner concerning possible solutions.
Ben, Ron’s financial planner, knows that Ron is downsizing. Ben is aware that Ron sold his property in Melbourne. Ben begins to consider whether the small business CGT concessions may apply.
Are the basic conditions satisfied? Yes
a) Ron runs a business which has a turnover of less than $2,000,000 and he has less than $6,000,000 of CGT assets.
b) He sold a property which was used in the business, and the main purpose of the building was not to derive rent, so he satisfies the active asset test.
Does he meet the small business 15-year exemption? Yes
a) Ron is over 55 and has continuously owned the asset for at least 15 years before the sale.
b) The sale of the asset is in connection with his retirement, as a reduction in working hours is sufficient to meet the definition.
Ben is confident that Ron meets the necessary conditions. However, as Ben is not licensed to provide tax advice, he refers Ron to an accountant who will assess Ron’s position. The accountant agrees that Ron meets the basic conditions and satisfies the criteria for the small business 15-year exemption.
Ben recommends that Ron makes a CGT cap contribution to superannuation of $1,150,000 and then commence a transition to retirement income stream to supplement any potential loss of income caused by the downturn in his business. This income would be received by Ron tax free.
The contribution can be accepted by the superannuation fund as Ron is under 65. The amount of $1,150,000 is within the current CGT cap amount of $1,205,000. The contribution doesn’t fall foul of the fund capped contribution limits ($450,000 for those under 65 as at 1 July), as CGT cap contributions are exempt from these provisions, nor is the amount counted towards the concessional or non-concessional caps as the contribution is tested against the CGT cap amount.
Further, as Ron qualifies for the small business 15-year exemption, the proceeds do not count against the small business retirement exemption of $500,000.
In addition, as Ron qualifies for the small business 15-year exemption, the capital gain he made on the sale of property is disregarded and therefore does not count towards his assessable income.
Ron is comfortable implementing the recommendation as he can make a substantial contribution to superannuation tax free with a CGT cap contribution and is also able to commence a transition to retirement
(TTR) pension and receive a tax-free pension.
Pre-retirement strategies involve commencing a TTR pension
if the individual is above preservation age, which is currently 55 years or older; however, this will eventually increase to 60 years.
A TTR pension allows the pre-retiree to draw out income from their superannuation, which is currently limited at 10% of the account balance, and allows them to maintain their income by continuing to work either full or part time.
A really common strategy is to continue working full-time while salary sacrificing. You can maintain your current net income but also boost your retirement savings as well.
Pre-retirees can also opt for a TTR pension if they require additional money to meet their cash flow requirements or to pay off debt and bills. You could commence your TTR pension, boost your income and use the money to pay off housing debt, or if you’re self-employed, meet some short-term cash flow issues. It’s typically suited to those who are over 55, they’re looking to boost their superannuation contributions, they are looking to reduce their work and boost their income or they simply need some additional cash.
Personal deductible contributions
Personal deductible contributions are where an individual can claim a tax deduction for personal contributions into superannuation. The benefit of claiming a tax deduction for personal contributions to superannuation is that it not only reduces tax for the individual, but also increases their superannuation balance.
It’s really important that you’re eligible to claim a tax deduction. If you’re not the ATO would disallow the deduction and the amount will be attributed as a non-concessional contribution.
It’s important that you lodge the correct form. If you don’t lodge the correct form, the superannuation fund can’t record the contribution as a concessional contribution and you generally won’t be entitled to the deduction. This strategy is particularly attractive for self-employed individuals or those with less than 10% of income from employment income. It can be attractive for those who are self-funded, who are eligible to contribute to superannuation and who are producing assessable income, so advisers should remember those two target clients.
Salary sacrifice involves a contractual arrangement by an employee to receive remuneration in the form of a benefit or superannuation contribution as opposed to receiving it as salary.
Pre-tax salary is foregone by the employee in favour of employer-provided benefits such as superannuation. Only future salary entitlements, that is those not yet earned, can be sacrificed.
is a common component of salary packaging and can potentially provide significant tax savings for employees.
Generally, salary sacrifice arrangements are effective for any employees who have a marginal tax rate higher than 15%. However, the greatest benefits are received by employees on the highest marginal tax rate.
Case study 3: Salary sacrifice
Brenda, age 35, earns $60,000 p.a. She has a superannuation balance of $30,000 and salary sacrifices $1,040 p.a. ($20 per week).
Brenda No salary sacrifice Salary sacrifice
Gross salary $60,000 $60,000
Salary sacrifice $0 $1,040
Assessable income $60,000 $58,960
Income tax $12,200 $11,824
Net disposable income $47,800 $47,136
Net employer superannuation contribution (including superannuation guarantee) $ 4,590 $ 5,474
Retirement savings at age 65 $263,506 $303,129
- Gross rate of return is 6%
- Income tax rates applicable for the 2011/12 financial year
- Income tax figures include Medicare levy, low income tax offset, and flood levy
- Figures are in current dollars
- Retirement savings Include 9% superannuation guarantee (SG) contributed each year
- Indexation of salary thresholds is 3% p.a.
Superannuation guarantee is calculated on pre-salary sacrifice income.
Older or younger individuals can also benefit from salary sacrificing. Figure 1 illustrates the potential outcome of individuals aged 25, 35, 45 and 55; salary sacrificing $20 per week.
The benefits of salary sacrificing are clear. Not only does it reduce assessable income for tax purposes, it increases retirement savings — even if small amounts are contributed regularly. In addition, the salary sacrifice strategy can be employed at any age (if under 75).
Tips and traps
Individuals need to be aware that salary sacrificed contributions count towards the concessional contribution limit. When determining how much to salary sacrifice, superannuation guarantee amounts and other concessional contributions (such as existing salary sacrifice contributions) must be accounted for.
Employees should also confirm with their employer that superannuation guarantee is calculated on pre-salary sacrifice salary and not reduced salary.
Insurance in superannuation
Funding insurance inside superannuation is another effective strategy that can offer individuals a range of benefits.
Insurance in superannuation
is a great strategy and advisers should not forget it so remember you can put life insurance, TPD insurance, income protection insurance and in some cases trauma insurance inside superannuation.
While trauma insurance is not deductible to the fund, life insurance and income protection may be fully deductible to the fund. Depending on the type of policy TPD may also be tax deductible. This can result in the member effectively paying for insurance premiums using pre-tax dollars. When insurance is owned by the superannuation fund, it can then be used to pay a benefit to a member or surviving beneficiary. Such a benefit will often be tax-free.
However, it should be remembered that where a death benefit is paid to a beneficiary who is not considered a tax dependant for superannuation purposes, such as an independent adult child of the member, the beneficiary is likely to be subject to tax of up to 30% depending on the tax components. Further, the taxable component of any benefit will also form part of the beneficiary’s assessable income.
In addition, where the member receives a disability benefit, part of the benefit may be subject to taxation when the member receives their disability benefit where they are aged under 60.
A superannuation fund can release funds to a member via permanent incapacity or terminal medical condition of release. Alternatively, a death benefit could be released to pay the proceeds to your spouse, your kids or another nominated beneficiary.
The advantage of putting insurance in superannuation, compared to holding the insurance outside of super, is the proceeds are paid to the super fund. This means that you don’t have to contribute the proceeds to super and are not subject to contribution caps.
Take the case of a client with $2 million worth of insurance inside super, the proceeds are paid directly to the super fund, and no amount is tested against the contribution caps.
Where a member of a superannuation fund dies, the superannuation fund is obliged to pay a death benefit as soon as practicable after the death of the member. Depending on the trust deed of the fund and superannuation death benefit laws, this may be paid as a lump sum or pension.
Having insurance within a client’s superannuation fund can be useful for those clients, with cash flow problems, as the insurance premium can be paid from their accumulated superannuation.
It’s also great for someone who wants to pay the insurance premiums
by making tax deductible or salary sacrifice contributions to superannuation, but really it’s going to be anyone that’s interested in insurance.
When looking at insurance inside superannuation for an SMSF, the trustees of fund need to ensure that the offering that they provide is still compliant with the sole purpose test and the fund’s trust deed.
That may affect the features that are offered on the insurance products within super — it may be a more cut-down version of what would normally be offered outside super. Trustees need to be aware that it is ultimately their responsibility to ensure that the sole purpose test is met.
SMSF trustees should be aware that while they can put trauma insurance inside superannuation, they do need to remember that the fund cannot claim a tax deduction for those insurance premiums. You need to remember that any specified illnesses that a trauma insurance policy may pay out on do not necessarily align with a condition of release, and what that means for your client is the trauma policy may pay out and the proceeds may be locked into superannuation so just consider those facts clearly before you recommend the strategy.
Insurance funded by the co-contribution
If insurance is held through superannuation and non-concessional contributions (after-tax contributions) are made, the co-contribution may either partially or wholly fund premiums and/or increase retirement savings.
Retirement savings are not depleted as long as premiums are no higher than personal and government contributions. This is particularly important for low income earners, as they typically have lower retirement savings balances compared to higher income earners.
Case study 4: Insurance funded by the co-contribution
Molly and Jacob are both age 30. Molly works part time as a personal assistant to the director of a small printing company and earns $25,000 p.a. Jacob works as a junior car phone installer and earns $35,000 p.a.
If Molly and Jacob make non-concessional contributions into super, they would be eligible to receive the co-contribution assuming all other criteria have been satisfied.
Upon consultation with their adviser, Molly and Jacob would like to purchase the following life cover:
Life cover Molly Jacob
Term life and TPD insurance $400,000 $500,000
Premium cost p.a. $600* $720*
* Stand alone term life and TPD policies
As Molly earns under the lower income threshold for the co-contribution ($31,920), the Government will match each after-tax dollar contributed into super, up to a maximum of $1,000. Therefore, if Molly makes a non-concessional contribution of $600, the Government will also contribute a further $600 to her super as a co-contribution is paid. Once insurance premiums have been deducted, the remaining amount ($600) will compound over time and increase retirement savings.
If Jacob makes an after-tax contribution of $720, the Government will also contribute a further $720 to his super as a co-contribution. Once insurance premiums have been deducted, the remaining amount ($720) will compound over time and increase retirement savings.
Furthermore, if Molly and Jacob employ the above strategy every year, this will increase their retirement savings substantially by age 65.
Molly Outside super Inside super
Premium $600 $600
Contribution to super $0 $600
Government co-contribution $0 $600
Immediate increase to super
(after payment of premium) $0 $600
Increase in retirement savings at age 65 $0 $46,222
- Figures are in current dollars
- Includes 9% super guarantee
- Initial super balance of $5,000
- Gross rate of return 7.95%
- Indexation of salary and co-contribution thresholds is 3% p.a.
If insurance is held inside superannuation, Molly’s retirement savings increase by $46,222, while Jacob’s retirement savings increase by $55,467 by age 65. This is due to co-contribution entitlements from making after-tax contributions into super. If insurance is held outside super, the co-contribution is not payable unless making other after-tax contributions.
Tips and traps
If the co-contribution is already being received, the above strategy will not increase retirement savings compared to the existing arrangement. However, retirement savings will not be depleted, as long as contributions cover premium amounts.
It is important to calculate the amount of co-contribution receivable, as it may be less than the non-concessional (after-tax) contribution made on higher income levels. Individuals should be careful that non-concessional contributions do not exceed the non-concessional contributions limit.
Note: The co-contribution does not count towards any contribution limit.
Useful tips implementing super strategies
There are potential traps that advisers need to be aware of when implementing these superannuation strategies.
Three key issues for advisers to consider include:
1. Understand the rules
2. Supply the correct notification
3. Keep in mind the contribution caps.
If financial advisers want to avoid the majority of mistakes that we would see in technical services, it would be make sure they understand the rules, make sure they supply the correct form and make sure the contributions don’t exceed the contribution caps.
Understand the rules
For financial advisers, having a solid comprehension of the rules as well as understanding the implications of getting things wrong is essential.
Financial advisors need to understand the rules before they put the strategy in place. A great example is tax-deductible contributions to super. There can be certain times that a super fund is prohibited from accepting a notice of intent to claim a tax deduction.
One of those is if the super fund has commenced a pension, another is if the super fund doesn’t hold the contribution, and another is if the Notice of Intent relates to a period previous to when the contribution was made so there’s a cut-off period there.
Hence, if clients try and claim a tax deduction which contravenes those rules, then the member will be disallowed the contribution. Financial advisers should also be mindful of the work test rules where the individual needs to meet the work test to be able to contribute into superannuation if they’re age 65 or older.
Supply the correct notification
It’s also important that financial advisers supply the correct notifications as failure to supply the correct form or notification can lead to errors. This means not sending in a cheque with a letter attached as this can lead to administrative errors. The problem being that an administration department may misinterpret the intention and attribute the contribution to the wrong label. Unwinding those contributions is very difficult. By the same token, if advisers are making a contribution under the small business concessions which is your CGT cap contributions, the form needs to be supplied before the contribution is made or when the contribution is made. If it’s supplied after, the super fund is prohibited from accepting the contribution as a CGT cap contribution. That’s a legislative restriction.
Keep in mind the contribution caps
Financial advisers should also be very mindful of the contribution caps in order to ensure their clients avoid paying excess contributions tax. We think most financial advisers know that super guarantee amounts fall under the concessional contribution cap. However, we think a common thing that’s coming through recently is the effect of the new rules with personal deductible contributions and withdrawals. What that is, is where a self-employed person would make a personal contribution to super and they make a subsequent withdrawal. The impact of that is that the withdrawal is deemed to be partially funded from that contribution and therefore the remaining amount within super and hence the amount that is able to be deducted, is lower.
There’s a bit of confusion currently with how that works. Multiple withdrawals make it even more complex, so it’s something that financial advisers need to be fully aware of.
Pending superannuation legislation
With the current raft of legislative reforms of superannuation making their way through the parliamentary process, if passed, these law changes could potentially impact the ongoing viability of particular superannuation strategies.
Higher concessional cap
One of the legislative proposals includes the concessional limit for those aged 50 or older where they have superannuation balances of less than $500,000.
The way this cap will operate is a bit of an unknown. We have a draft consultation paper and it doesn’t tell us whether you value that $500,000 at the beginning of the year or the end of the year. It doesn’t tell us whether you include lump sum withdrawals, whether you include account-based pension balances or whether you would just be excluded from the cap entirely if you commenced an account-based pension, so we need to know how this cap will operate going forward.
The legislative changes arising from the proposals of maintaining the concessional contributions cap where a person aged 50 or over has a balance of less than $500,000, may lead advisers to consider the following strategies for their clients in order to remain under the cap:
- Delaying salary sacrifice contributions
- Delaying large contributions
- Insurance in super
- Limited recourse borrowing arrangements for SMSFs.
Financial advisers may need to consider strategies such as delaying large contributions or keeping salary sacrifice superannuation contributions just down to a minimum to hang on to that lower level for another one to two years.
Financial planners might consider putting insurance inside super and the reason being is the insurance premiums will reduce the account balance and that might help someone to remain on the higher cap for just a little longer and for those who have self-managed super funds they might look at putting limited recourse borrowing arrangements in place.
A limited recourse borrowing arrangement in certain cases will reduce the account balance as the superannuation fund is paying off the loan repayments.
Refund of excess contributions
The Government has also proposed to refund up to $10,000 of excess concessional contributions for first time breaches. That will help in some cases and they’ve said that for the most part that is where the excess contributions tax has been applied. However, it won’t help people who make excess contributions of more than $10,000 and it won’t help those people who have breached the limits before. For those people they’ll still have the option of applying for discretion from the ATO.
Investments inside and outside superannuation
Given the legislative risks associated with superannuation, it may be a prudent strategy for an adviser to consider diversifying retirement savings between superannuation and non-superannuation assets.
However, while this decision will generally depend upon an individual’s own objectives and circumstances, the fact remains that investing inside superannuation is concessionally taxed, which is attractive for most people. We think if you’re looking at the legislative risk, yes there are always changes to super. We don’t know what it’s going to be like in a couple of years time but the consistent thing within super is that it has always been concessionally taxed compared to holding your investments outside superannuation.
So we think we can be fairly sure that it will remain that way and I think to diversify outside super for most of your working life you would be missing out on a lot of those tax concessions.
The fact that superannuation is also tax free for those age 60 years or older is another good reason for an individual to keep their money inside superannuation.
If superannuation is in pension phase it’s tax free. If you’re above 60 the payments are also tax free, so the tax concessions alone tell us the Government wants you to put money into super and use that for your retirement. Those who invest outside super often end up trying to get part of their savings into super before retirement. The problem is that under the current rules, there may be limits as to how much they can contribute.
For those who do choose to invest outside of super it can be a great strategy because you may be able to invest into assets that you can’t invest into within superannuation and that’s certainly relevant when you’re looking at a raft of changes for investment into collectibles and personal assets for self-managed super funds. The other thing that you should consider is if you invest outside of superannuation when you sell assets held outside of super, in order to contribute the proceeds into super you may get slugged with a capital gains tax bill and then you’re back to hitting superannuation contribution cap issues.
For the most part, superannuation remains the retirement savings vehicle of choice due to the mandatory nature of the SG.
Even for those who don’t have to make contributions into superannuation, the Government still makes it attractive, offering tax concessions for contributing into superannuation.
For individuals looking to boost their retirement savings, there are a number of effective superannuation strategies that advisers could consider recommending to their clients. However, it’s important they keep abreast of pending superannuation reforms which could potentially impact the ongoing viability of some strategies.