Have a Super New Year!

The lifestyle you have envisioned for the future versus what you can afford will depend upon how much money you can save before retirement…

Super of an employee

If you are an employee, you can’t only rely on your employer super contributions and investment returns to accumulate enough to retire.

Business Owner

If you are a business owner and paying super for your employees, you also need to follow suit and ‘pay yourself first’. Investing outside your business is very important, especially if you are only relying on the sale of business to fund a future lifestyle. Disruption is everywhere, buyers may be difficult to find, and valuations may be much less than you anticipated.

You may need to do more

Here are three options to grow your super:

1)   Add more savings into your account – inside and outside of super.

2)  Use tax deductions to boost your super.

3)  Invest in assets that have the potential to produce a higher rate of return.

These may sound simple, but you need a plan and the discipline to stick with it.

Add more savings

Understand how much you can afford to save from each pay and commit to investing it every fortnight or month. I regularly assist people with mapping out their expenses and identifying cost reductions.

If you don’t already have a cash reserve, you might need to split the money you can save into a non- super investment as well as into super, so you also have funds for any unexpected situations before you retire.

Super contribution tax effectiveness for employees

If you are an employee, you can ask your employer to pay part of your pre-tax pay into your super account. This is known as a salary sacrifice or salary packaging. These payments are called ‘concessional contributions’ and are taxed at 15%. For most, this will be lower than their marginal tax rate. You will therefore benefit because you pay less tax whilst you boost your retirement savings.

Generally, making extra concessional contributions is tax effective if you earn more than $37,000 per year.

However, before deciding on changes to current salary sacrifice arrangements it will be important to consider your own personal circumstances including:

 

1)  Your age.

2)  Your taxable income (including salary).

3)  Employer SG contributions for the financial year.

4)  Implications of the salary sacrifice on employment benefits/packages.

Super contribution tax effectiveness for business owners

For business owners or the self-employed, you can make regular or lump sum payments, can usually claim a tax deduction on contributions and may be able to save tax. There are two ways to contribute, depending upon how you pay yourself. If you receive:

  • A wage – set up a regular transfer into super from your before-tax income.
  • Income from Business revenue – transfer a lump sum when you have enough cashflow.

Contribution Limits – Concessional and Non-Concessional

There are two types of super contributions: concessional and non-concessional.

1)    Concessional contributions

Concessional contributions include your Employer Super Guarantee (SGC) and personal contributions (as discussed above). These are contributions where the contributor will receive a tax deduction for making the contribution into super.

The combined total of your employer and salary sacrificed contributions must not be more than $27,500 per  financial year. However, the exception is if you have a superannuation balance or combined balances of less than $500,000. If this is the case, you can utilise carry-forward unused concessional contributions and benefit from your unused cap from the previous year.

2)    Non-concessional contributions

Non-concessional contributions are after-tax contributions paid from your bank account into super. A tax  deduction is not claimed on these contributions.

The limit for these is $110,000 each financial year, the exception being if you’re under the age of 65, you can use the bring-forward rule. This means that you can bring forward up to two years’ worth of caps enabling you to potentially contribute up to $330,000 in any one year, with no further contributions allowable for the next 2 financial years.

It’s important to note that since exceeding these contribution caps can result in additional taxes, it would be prudent to seek advice to ensure that you’re taking the right steps to maximise your superannuation contributions.

Invest in assets with the potential for higher return

It is important to understand that superannuation is just a tax structure, you have choice as to how your super funds are invested across the major asset classes – cash, fixed interest, shares (both Australian and International) and property.

Investing in growth asset classes (shares and property) has the potential to produce higher returns, but you need to consider your current life stage, your investment time horizon, and ‘the higher the potential return, the higher the level of risk’.

We find that most people will benefit from a mix of assets to spread the risk. Obviously, a higher rate of return will allow your super to grow at a much faster rate.

As an example, based on a superannuation balance of $500,000 invested over a 10-year time frame a 2% difference in return (4.5% vs 6.5% pa compound) will result in approximately $162,000 in additional accumulated super benefits.

Super conclusion, putting all this together……

How you decide to grow your super needs to be in line with your needs and purpose.

Some thought needs to be given as to how much you can save, whether to make a personal after-tax contribution or salary sacrifice and what level of investment risk you are willing take.

Putting in place strategies to make your super grow faster may help you to enjoy a more comfortable lifestyle in retirement and may elevate the reliance on the sale of a business, providing a level of protection due to changing market conditions.

You may need some help to understand your current reality, identify your purpose and goals and a gain a  level of clarity around what is possible. This will ensure that you have a level of confidence in making the right decisions for your financial future.

This is where we can assist.

 

Andrew Bolingbroke enjoys building long-term relationships with clients and working alongside them as their life plans develop and change over time. This gives his clients confidence that, through Boutique Advisers, they have clarity and structure around their finances.  Andrew enjoys working collaboratively with clients’ other trusted advisers to ensure that they have a truly holistic financial journey.

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