Doing the right thing for your superannuation also means knowing what not to do. It can be easy to get caught out if you are not aware of specific rules and restrictions. Here are 4 tips to help you make the most of your super contributions.
1. Do avoid the 'traps of caps'
Contribution caps limit how much you can contribute to your super in any one financial year without incurring excessive tax. They are designed to prevent people taking unfair advantage of super’s preferential tax treatment, while encouraging those who need it most to contribute.
Contributing to super is one of the most tax effective ways of building financial security for your future. But exceeding the caps can be a costly mistake. Contributions over the caps are taxed at 46.5% for excessive non-concessional contributions and 31.5% for excessive concessional contributions. This is in addition to the 15% contributions tax that has already been paid by the super fund.
Even if you exceed the caps by making an inadvertent error, you will still generally have to pay the higher rate of tax. If you think this can’t happen to you, 65,000 people breached their concessional cap in the 2009-10 financial year, up from 28,000 people the previous year1.
The Government recently introduced legislation which will allow excess concessional contributions to be taxed at an individual’s marginal tax rate, plus an interest charge (recognising that excess contributions tax is collected later than personal income tax). This will apply to contributions made on or after 1 July 2013. In addition, clients would be able to withdraw any excess concessional contributions made on or after 1 July 2013 from their superannuation fund without penalty.
Keep records of your super contributions and inform your financial adviser and tax adviser, so that you don’t risk exceeding the caps.
Contribution caps for 2012-13 and 2013-14
A higher concessional cap of $35,000 (unindexed) will apply to clients aged 60 or over from 1 July 2013 and clients aged 50 or over from 1 July 2014.
Concessional (pre-tax) contributions are generally made in three ways:
- compulsory employer contributions (known as Super Guarantee or Award contributions)
- salary sacrifice arrangements
- personal contributions claimed as a tax deduction by self-employed people.
Non-concessional (after-tax) contributions are personal contributions where no tax deduction has been claimed but may also include:
- excess concessional contributions
- spouse contributions
- excess Capital Gains Tax (CGT) contributions for example, in excess of the superannuation CGT cap.
2. Do consider making Non-Lapsing Death Nominations
Don’t assume your superannuation will always go to the beneficiaries nominated in your will. In fact, this may only be the case if your estate receives your super death benefit. To ensure your super fund pays according to your wishes, you may be able to make a Binding Death Benefit Nomination or a Non-Lapsing Death Benefit Nomination, which is also binding. Not all super funds offer these options (although most do), so talk to your financial adviser about the best way to allocate your super.
You should also consider the tax implications, bearing in mind that for tax purposes lump sum payments to dependants are tax-free, but taxable components paid to non-dependants will be subject to tax.
Your financial adviser can help you to determine whether a Non-Lapsing Death Benefit Nomination is appropriate for your situation.
3. Do find out how and when you can access your super
Preservation rules mean you can’t access your super until you meet a condition of release, including:
- retirement on or after preservation age (see table below)
- turning 65
- reaching preservation age and commencing a transition-to-retirement pension
- suffering from a terminal medical condition or being permanently incapacitated
- severe financial hardship as assessed by the trustee or on compassionate grounds as assessed by Centrelink.
The amount you can access may be restricted and subject to conditions.
A transition-to-retirement strategy may also be very effective and should be discussed with your financial adviser to see if it's appropriate for your circumstances. Make sure you understand the tax and estate planning implications of accessing your super as a lump sum or via an income stream.
4. Do review your long-term super strategies regularly
Your investment profile, including your appetite for risk, may change over time. It’s important to regularly review your super investment strategy.
Other factors to consider are the effects of inflation, tax and fees on your superannuation account and diversification. Spreading your super investments over different asset classes may offer better returns as well as reduce your investment risk.
While a lower risk strategy may help you sleep at night, you could be limiting the potential growth of your super balance, particularly if you have plenty of time before you plan to retire.
It’s worth speaking to one of our Planners at Southern Advisory to understand what investment options may be appropriate for you. Contact Us