In many Australian households, a significant disparity often exists between the superannuation balances of spouses. This ‘super gap’ can lead to financial stress and inequality in retirement. However, two powerful strategies – contribution splitting and spouse contributions – can help couples balance couples’ retirement savings and secure a more comfortable future together.
The Super Gap: A Common Challenge
Significant disparities in superannuation balances can arise from various factors, including:
- Career breaks for childcare or family responsibilities
- Part-time work arrangements
- Income disparities between partners
- Different employment histories
These circumstances often result in one partner accumulating substantially less superannuation over their working life, potentially leading to financial vulnerability in retirement.
Contribution Splitting: Sharing the Wealth
Contribution splitting is an effective strategy to address this imbalance. It allows a person to transfer up to 85% of their concessional (before-tax) contributions to their spouse’s super account. This approach offers several benefits.
- Balancing Super Accounts: By transferring contributions, couples can work towards more equitable super balances, ensuring both partners have adequate retirement savings.
- Insurance Coverage: For a spouse taking time off work, contribution splitting can help maintain their super balance, potentially preserving valuable insurance coverage within their super fund.
- Earlier Access to Super: If one spouse is older, splitting contributions to their account may allow the couple to access some of their combined super earlier.
- Maximising Age Pension: For couples approaching retirement, splitting contributions might lower the assessable super assets of the higher-balance spouse, potentially increasing their combined Age Pension entitlement.
- Protect against potential changes in legislation: Building more equal superannuation balances can help protect against the impact of potential changes in super legislation.
- Maximising the funds in pension phase: Splitting contributions between spouses will minimise the likelihood of any partner exceeding the transfer balance cap (the maximum level of funds that can converted into pension phase), thereby maximising the combined balance of funds in pension phase.
Spouse Contributions: Another Powerful Tool
In addition to contribution splitting, making after-tax spouse contributions is another strategy to boost a partner’s super balance. This approach can be particularly beneficial when:
- One partner has a low income or is not working
- There’s a significant age gap between partners
- One spouse is close to their contribution caps
Importantly, the contributing spouse may be eligible for a tax offset of up to $540 when making contributions to a low-income earning partner’s super account.
Strategic Considerations
When implementing these strategies, couples should consider:
- Contribution Caps: Ensure that contribution splitting doesn’t cause either spouse to exceed their contribution caps.
- Timing: Contribution splitting is typically done in the financial year following the contributions, except in special circumstances.
- Eligibility: The receiving spouse must be under preservation age (generally 60) or between preservation age and 65 and not retired.
- Fund Rules: Check that both super funds allow contribution splitting and spouse contributions.
- Long-term Planning: Consider how these strategies align with your overall retirement and estate planning goals.
Contribution splitting and spouse contributions are powerful tools for couples looking to balance their superannuation savings. By strategically sharing super contributions, partners can work towards a more equitable and secure retirement, ensuring that both individuals derive maximum benefit from the superannuation system. As with any financial strategy, it’s advisable to consult with a qualified financial adviser to determine the best approach for your specific circumstances. At Boutique Advisers we welcome the opportunity to meet with couples to help devise smart, tax-effective superannuation strategies which will help you meet their respective goals, purpose and legacy aspirations.
Karen Haarhoff is passionate about building long-term relationships with clients and working alongside them to achieve their financial and lifestyle goals. She enjoys helping clients make informed, confident decisions about their financial affairs and providing both clarity and structure around their financial affairs.