How to Maximise Your Retirement Savings and Tax Benefits
For many people, superannuation and retirement planning can be put off indefinitely. But when it’s time to retire, having a set-and-forget approach ends up costing money because it fails to maximise superannuation contributions and tax concessions.
But if you’re approaching retirement or it’s still several decades away, there are concrete steps to minimise your tax, maximise your retirement savings contributions before you retire, and maximise your pension after you retire. Here are a few ways you can make this happen.
Types of superannuation contributions
There are two types of superannuation contributions that you can use strategically to maximise your retirement savings and benefits: concessional and non-concessional.
Concessional contributions are made to your super account before tax. If you’re an employee, you receive a superannuation guarantee of 11% of your salary. This is paid into your account without taking tax out, as is done with your salary. If you decide to contribute additional funds to your super account – which can be done through salary sacrifice – they will only be taxed at 15% (or 30% if your income and before-tax contributions are more than $250,000/year). If you are below the $250 K threshold, and your marginal tax rate is 32.5%, you are saving more than 50% of your concessional contribution in tax when compared to taking the money as current income.
Remember that there is a concessional contribution cap of $27,500 per financial year, which includes all types of concessional contributions. But if your total super balance is under $500,000, you can carry forward unused concessional cap amounts from prior years for up to five years. This makes it possible to contribute more than $27,500 in a financial year and get the tax benefits.
Overall, concessional contributions to your super are a tax-effective strategy to boost your retirement savings.
You can also use non-concessional contributions to grow your super balance. These contributions are made to your super fund after tax, so they won’t reduce your taxable income. Generally, you can make up to $110,000 in concessional contributions per year. Depending on your age and super balance, you can combine three years of caps in one year.
Points to consider when making additional super contributions
While using superannuation for tax purposes can be beneficial, here are a few points to consider each year:
Determine what your contribution caps are for the current financial year.
Check the contributions made on your behalf (employer super guarantee payments).
Determine whether your contributions will be concessional, non-concessional or a combination of both.
If you make a personal concessional contribution (not from an employer as salary sacrifice), you will need to complete an intent to claim deduction form and submit it to your super fund.
You will need to allow enough time to ensure your fund processes your contribution before 30 June for the current financial year. This can take several days, so plan ahead to avoid being late and missing tax benefits in the current financial year.
If your income exceeds $250,000, be aware that there’s a Division 293 tax of 30% (instead of 15%) on concessional contributions.
The finer points of making super contributions to reduce your tax can be confusing, so it’s best to get professional financial advice.
Maximise your income in retirement
While superannuation strategies will help you maximise your retirement savings during your working life, it’s never too early to think about ways to maximise your retirement income streams to ensure they last for the remainder of your life.
One point to consider is how to withdraw your super once you reach your preservation age. If you were born before 1 July 1964, your preservation age will be between 55 and 59. If you were born on or after this date, it will be 60. Even if you continue working, you can access your super when you reach 65. The best retirement age will depend on several factors that need to be considered when planning for retirement.
Account-based pensions during retirement
While you can take a lump sum payment when you withdraw your super, other options, such as account-based pensions offer flexibility and tax savings.
Account-based pensions (also called allocated pensions) are a type of retirement income stream product that can be purchased with the money you have accumulated in your super fund. During retirement, they can provide a flexible and tax-effective way to access your super savings as a regular income stream during retirement rather than taking it as a lump sum. Here are the key features and benefits of account-based pensions:
Flexibility – account-based pensions offer flexibility in payment frequency (monthly, quarterly, half-yearly or yearly) and payment amount, subject to minimum annual withdrawal amounts set by the government that vary with age.
Tax benefits – for people 60 and over, the income payments from an account-based pension are tax-free. Investment earnings within the pension account are also tax-free, regardless of the retiree’s age. This makes account-based pensions a very tax-effective way to receive retirement income.
Investment control – with an account-based pension, you can control how your funds are invested. Options typically include a range of asset classes, such as shares, fixed interest, property, and cash. This enables you to customise your investment strategy to suit your risk tolerance and financial goals.
Estate planning – account-based pensions can be structured to ensure that any remaining balance is transferred to beneficiaries upon the account holder’s death, offering a straightforward estate planning tool.
No upper age limit – there’s no upper age limit for starting an account-based pension. However, rules around minimum withdrawals and contributions can affect the decision to commence one.
Potential for Centrelink benefits – depending on your total assets and income, account-based pensions may be assessed in a way that could allow you to qualify for partial Age Pension benefits.
A financial adviser can help you navigate account-based pensions to maximise the benefits.
Maximising your age pension
Another factor to consider when preparing for retirement is how to maximise your age pension. A few strategies that can be applied include:
Providing the correct values of your assets, as many will depreciate over time
Using an asset-based pension (see above)
Contributing to a younger spouse’s exempt super account from an accessible environment will decrease your assets and increase your pension.
There are other ways to increase your pension – a professional financial advisor can help you plan for these in advance.
Get assistance to maximise your retirement savings and tax benefits
Lanteri Partners Group develops and implements tailored financial plans that create, build and protect your wealth during your working life and retirement. We have achieved excellent outcomes for our clients for more than 30 years because our team members are dedicated and experienced. Our complete range of financial services is connected under one umbrella to cover all financial opportunities and life stages – so you can live and retire well.