The New Year is a good time to think about building up your retirement nest egg using your super. In the future, Government pensions may barely cover basic living costs and leave nothing for a few of life’s simple pleasures. All levels of Government are maxing out their (our) credit cards.
Coupled with an ageing workforce and a shrinking number of taxpayers it is inevitable that pensions will be squeezed and the pension age will continue to be pushed up. Your super may be your financial salvation so take every opportunity to top it up. Also super is a tax-effective way to save as investment earnings are taxed at 15% instead of at your marginal tax rate. Firstly a Government co-contribution is worth taking advantage of if you qualify. The maximum co-contribution is $500 if you earn less than $37697 and you contribute $1000 after tax to your super fund.
The co-contribution reduces progressively and cuts out when you earn more than $52697. See the ATO co-contribution calculator for details. There are two other basic types of contributions that you can make, concessional and non-concessional. Concessional contributions are, as the name implies, pre-tax contributions usually made by your employer, you if you are self-employed and/or through salary sacrifice.
The “concession” you receive for such contributions is a 15% tax charge instead of your marginal tax rate that you would pay if you take the earnings in cash. The amount you can contribute pre-tax is currently capped at $25,000 per year and penalties apply if you exceed the cap. Non-Concessional contributions can be made from after-tax income or savings and have more generous contribution ceilings. If you are under age 65 and you have less than $1.6m in super, the annual Non-Concessional Contributions limit is $100,000 or $300,000 over a three-year period.
You can contribute $300,000 at the start of a three year period using what is known as the “bring forward” rule. In July 2019 the Government provided another opportunity to top up your super if you are over 65 and decide to downsize to a smaller property. You can contribute up to $300,000 ($300,000 each for a couple) from the proceeds of selling your home. To be eligible to make a downsizer contribution to super the amount you are contributing must be from the proceeds of selling your home where the contract of sale is exchanged on or after 1 July 2018.
You or your spouse must have owned your home for 10 years or more prior to the sale. Your home must be in Australia and not a caravan, houseboat or other mobile home, and you must not have previously made a downsizer contribution to your super from the sale of another home. You must make your downsizer contribution within 90 days of receiving the proceeds of a sale, which is usually at the date of settlement. The downsizer contribution does not count towards your contributions cap and you do not have to purchase another property to qualify.
If you are contemplating selling your home and making a contribution to your super from the sale proceeds it is important to consider the impact on any Centrelink benefits that you receive. Whereas the money tied up in your permanent place of living does not count towards the Centrelink assets test, downsizer money transferred to super will be treated as an asset, which will reduce your benefits if the value of your assets exceeds the allowable maximum. As always, inform yourself before making any financial decisions. Check out moneysmart.gov.au
Peter Dallimore is a volunteer Financial Counselor at the Bribie Island Neighbourhood Centre. He can be contacted through the Centre on 3408 8440 or by Email at bincfc@ gmail.com. You can make contact if you are experiencing financial hardship or would like general information on financial matters. The service is free.