Are you confident you’ve taken all the right steps to optimise your super leading into retirement? The truth is, most people aren’t.
It can leave you wondering if you’re truly prepared for the years ahead.
But don’t worry! In this article, I will equip you with 10 essential retirement planning strategies that our clients use every day. These strategies not only boost your super but also reduce your tax, ensuring your retirement savings last longer.
Ultimately, helping you transition into retirement with more confidence.
If you’d rather watch than read, this video also covers the topic:
10 Retirement Planning Strategies
During your final working years, the general objective should be to get as much into super as possible, due to the concessional tax treatment on investment earnings and tax-free retirement income.
As you approach retirement, it’s essential to have a strategic plan in place. Below, we outline ten key strategies that our clients are successfully implementing every day.
1. Salary Sacrifice
Salary sacrificing involves asking your employer to redirect a portion of your salary into your superannuation account, rather than receiving it as personal income.
Why would you salary sacrifice? When you make salary sacrifice contributions into super, this portion of your wage is taxed at only 15% (30% if you earn more than $250,000) upon entering super, rather than being taxed at up to 47% when received as a wage in your own name.
What should you be aware of when salary sacrificing? Some things to be aware of when salary sacrificing into super include:
- Access to funds – Any amount salary sacrificed into superannuation cannot be accessed until you reach at least age 60.
- Reduced income – Salary sacrificing will reduce your net take-home pay. Therefore, you need to ensure you have enough money to cover everyday expenses.
- Concessional contribution cap – Salary sacrifice contributions count towards the concessional contribution cap of $30,000 per person, per financial year.
2. Personal Concessional Contributions
Personal concessional contributions occur when you deposit a lump sum into your super account from your personal bank account and then claim a tax deduction for the amount contributed. Both employees and self-employed individuals can make personal concessional contributions.
Why would you make personal concessional contributions? Receiving a personal tax deduction for making super contributions will simultaneously increase your super balance and reduce your personal income tax. Even though contributions tax of 15% will be payable (30% if earning more than $250,000 per year), the contributions tax rate should be lower than your personal tax rate.
What should you be aware of when making personal concessional contributions? Some of the considerations you should be aware of when making personal concessional contributions include:
- Access to funds – the amount contributed to super cannot be accessed until you reach at least age 60.
- Age limits – if you are aged between 67 and 75, you will need to satisfy the superannuation work test (or work test exemption) to be eligible to claim a tax deduction for personal super contributions. The work test requires you to work at least 40 hours over 30 consecutive days.
- Submit notice to super fund – You need to notify your super fund of your intention to claim a tax deduction for the intended amount and receive confirmation from them prior to submitting your tax return or transferring any of your funds out of the account.
3. Unused Concessional Contributions
Carry-forward unused concessional contributions refer to your ability to utilise any unused portion of your concessional contribution cap from the previous five years (on a rolling basis), provided your super balance was below $500,000 on the 30th of June just prior to the current financial year.
Why would you use unused concessional contributions? Using unused concessional contributions can not only increase your super balance, but can also significantly reduce your personal income tax in any one year. Utilising any unused amounts can be particularly useful in years when you have a higher than usual taxable income or sell an investment with a large capital gain.
What should you be aware of when using unused contributions? Here’s a few things to be mindful of before utilising unused contributions:
- How much to use – Unused concessional contributions can easily run into the tens-of-thousands, but it’s not always best to use the full available amount. You should speak with your financial adviser or accountant about the optimal amount based on your tax position for the year.
- Eligibility – You can only use unused amounts if your super balance was below $500,000 on 30 June in the financial year preceding this one.
4. Non-Concessional Contributions
Non-concessional contributions are after- tax contributions made into super from your personal bank account that you do not claim a personal tax deduction for.
Why would you make a non-concessional contribution? Non-concessional contributions allow you to invest more in the tax-effective superannuation environment, ensuring tax on investment earnings is limited to a maximum of 15%, reducing to 0% in retirement. The compounded benefits of these tax savings can give you more in retirement and have your retirement savings last longer.
What should you be aware of when making non-concessional contributions? Here are some things to consider prior to making non-concessional super contributions:
- Non-concessional cap – The general non-concessional contribution cap is $120,000 per person, per financial year. Exceeding this cap (without using the bring-forward rule) can result in excess contributions tax.
- Accessibility – Once funds are contributed to super, you are unable to access them until age 60 at the earliest. Therefore, you should ensure you won;t need these funds prior to then.
5. Bring-Forward Rule
The bring-forward rule allows you to bring forward the next two years of the non-concessional contribution cap and invest up to $360,000 over a three financial year period, with no regard to the annual cap. The bring-forward rule is triggered in the financial year that your non-concessional contributions exceed the annual cap of $120,000.
Why would you use the bring forward rule? Using the bring-forward rule allows you to get more into super sooner, which can be particularly useful if you have a large lump sum to contribute resulting from the sale of an investment property or receipt of an inheritance, for example.
What should you be aware of when using the bring forward rule? There’s a few things to consider before using the bring-forward rule, including:
- Timing – The bring-forward rule is triggered in the financial year that your non-concessional contributions exceed the general cap. A key consideration is whether you should trigger it this year or next.
- Amount – Although the bring-forward rule allows you to contribute up to $360,000, you do not need to contribute this amount. A lesser amount might be more appropriate.
6. Transition to Retirement Pension
A transition to retirement pension is a retirement income stream that you can start with your superannuation accumulation balance even while you are still working. Affectionately known as a TTR pension, it allows you to receive tax-free income of between 4% and 10% of your balance each financial year.
Why would you start a transition to retirement pension? A transition to retirement pension can provide you with a supplementary source of income that allows you to reduce your working hours in the lead-up to retirement, have more income to pay down debt faster, or reduce tax through a transition to retirement strategy (replacing a taxable wage through salary sacrifice with tax-free TTR pension income) or recontribution strategy.
What should you be aware of when starting a transition to retirement pension? Before starting a TTR pension, you should be aware of the following risks and considerations:
- Future contributions – rather than using your total super balance to start a TTR pension, you might consider leaving a small balance in your accumulation account for the account to remain open so that future super contributions can be made into it.
- Insurances – if you have existing insurances in your accumulation account, you should be mindful not to close your accumulation account if you would like to retain the insurances. Consider leaving enough in the account to consider covering premiums until at least retirement.
- Reducing retirement funds – Accessing your super via a TTR pension prior to retirement, without replacing it through contributions, is likely to leave you with less super to fund your retirement.
7. Account-Based Pension
An account-based pension is a flexible retirement income stream that allows you to choose the level of income you would like to receive each year, subject to a minimum amount. You can also make ad-hoc lump sum withdrawals at your discretion and choose how your balance is invested. Plus, all pension income and all investment earnings (including capital gains) are received completely tax free.
Why would you start an account-based pension? Once retired, an account based pension can be your main source of retirement income and be used in conjunction with other sources of income, such as the Age Pension and investment income to cover retirement expenses. Tax-free income and earnings make an account based pension a very tax-effective way of funding retirement.
What should you consider before starting an account-based pension? There are a few things to think about before starting an account-based pension, including:
- Longevity risk – an account-based pension is not guaranteed to provide you with an income for the remainder of your life. The longevity of an account based pension is determined by your level of drawdown and the investment earnings within the account. Once the account balance reaches $0, no further pension payments will be received.
- Investment options – now that you’ll be drawing down on your retirement savings, you need to review how your superannuation is invested. You’re effectively going from buying investments at regular intervals (contributions) to selling investments at regular intervals (pension payments). Usually a more conservative portfolio can provide greater certainty in retirement and less overall impact in weak economic environments.
- Income drawdowns – Ideally, you should be considering only withdrawing from a pension account as much is required to cover expenses and no more. Leaving as much as possible in tax-free pension phase
8. Recontribution Strategy
A recontribution strategy is the process of making withdrawals from your superannuation account and immediate contributing them back into super as a non-concessional contribution, with the intention of converting taxable components to tax-free components. This can reduce or eliminate taxes on death.
This can be done by lump sum withdrawals (if eligible), or through account-based pension payments or TTR pension payments being re-contributed. Importantly, all withdrawals must be made proportionately from each component.
Tax-free components arise from after-tax contributions made to super and taxable components are the remainder of the balance.
Why would you employ a recontribution strategy? If there’s a possibility that your super will be paid to a non-tax dependant (e.g. an adult child), the taxable component portion of your super will be taxed at 17%. By performing a recontribution strategy, you can reduce or eliminate this impact of this tax by effectively converting taxable to tax-free components.
What should you consider before implementing a recontribution strategy? Some considerations before employing a recontribution strategy include:
- Contribution caps – Withdrawing super and contributing, you are using up contribution caps for money that was already in super. This could restrict your ability to get more money into super.
- Withdrawal taxes – Generally, withdrawals from super from age 60 onwards are tax-free. However, if your super balance includes any untaxed components, withdrawal taxes may be payable.
- Sale of investments – You should be mindful of any investments within super that need to be sold to complete a withdrawal and recontribution strategy and the associated transaction costs.
- Capital gains tax – If investments do need to be sold to complete a recontribution strategy, you should be aware of potential capital gains tax implications resulting from the sale.
9. Spouse Contribution Tax Offset
A spouse contribution can provide you with a personal tax offset of up to $540 per year if you make a contribution of up to $3,000 to your spouse’s super account and your spouse has an income below $40,000.
The tax offset amount is calculated as 18% of the lesser of:
- $3,000 minus the amount by which your spouse’s income exceeds $37,000; and
- The sum of your spouse contribution for the year.
To be eligible for the spouse contribution, the contribution needs to be made directly into your spouse’s super account, you need to notify your super fund that it was a spouse contribution and you need to record on your tax return that you made the spouse contribution.
Why would you make a spouse contribution? A spouse contribution can provide you with a tax offset of up to $540 each year, which is an effective return of 18% on your $3,000 contribution amount.
What should you be aware of when making a spouse contribution? There are a few considerations when making a spouse contribution, including:
- Non-concessional cap – the contribution will count towards your spouse’s non-concessional contribution cap. Therefore, you need to ensure this contribution will not cause them to exceed their cap.
- Not deductible – the spouse contribution must be a non-concessional contribution, which means you are unable to claim a personal tax deduction for the contribution.
- Made into your spouse’s account – the spouse contribution must be made directly into your spouse’s account. It cannot be made into your account and then transferred across.
- Total super balance – your spouse needs to have had a total super balance of less than the general transfer balance cap of $1.9 million on 30 June of the preceding financial year.
- Under age 75 – your spouse needs to have been less than 75 years of age when the spouse contribution is made.
10. Downsizer Contribution
A downsizer contribution is a contribution made into superannuation with proceeds from the sale of your home. You can contribute up to $300,000 per member of a couple as a one-off contribution to super, without the contribution counting towards any other contribution caps.
To be eligible to make the contribution, you need to be at least age 55 (no upper age limit), have owned your home for at least 10 years and it needs to have been at least partially exempt from CGT under the main residence exemption. Plus, the contribution needs to be made within 90 days of receiving the home sale proceeds.
Why would you make a downsizer contribution? A downsizer contribution allows you to invest more of your wealth into the tax-effective superannuation environment, without the contribution amount being counted towards any other contribution caps and without being restricted by your total super balance.
What should you be aware of before making a downsizer contribution? Some of the things you need to be mindful of before making a downsizer contribution include:
- Access to funds – once contributed to super, these amounts cannot be accessed until at least age 60.
- Once only – a downsizer contribution can only be made once in a lifetime.
Using one or more of these retirement planning strategies is likely to improve your financial position as you approach retirement, giving you the ability to retire sooner, or with more. However, for these strategies to be effective, they need to be relevant to your situation and implemented correctly and with certainty.
This is where we can help.
Toro Wealth specialises solely in retirement planning advice. Our aim is to give you confidence around when you can retire, the retirement income you can achieve and how to optimise your financial position in the lead-up to retirement. If you’re interested in learning more about our service and cost, click here.
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