The Role of Superannuation in Retirement Planning

Retirement planning is made complex by the amount of legislation and regulations that have been imposed on superannuants and retirees by successive governments over several decades. The superannuation regime in Australia provides significant tax benefits and the legislation is principally aimed at ensuring these benefits are equitably spread across the broader population. This implies that Australians not maximising the tax concessions of superannuation are, in effect, subsidising Australians who are maximising superannuation benefits.

This is why it is important to consider some fundamental strategies that can be applied to maximise the tax benefits of superannuation and retire with a higher superannuation balance that supports a comfortable lifestyle in retirement. The tax concessions allowable on contributions to and earnings of superannuation savings should be a key component of every retirement plan.

Mortgage-free retirement should be a primary objective of every Australian seeking a comfortable retirement lifestyle. A retirement plan should incorporate this key outcome because the use of retirement funds to pay-out a mortgage is a poor use of retirement capital. This is why the advice of a financial planner is essential in developing a retirement plan. Retiring mortgage-free requires planning from around mid-life or earlier and so it is never too early (or too late) to implement a retirement plan.

Salary sacrifice is a tax-effective way of adding to your superannuation balance. Superannuation contributions can be deducted from pre-tax income and these contributions are taxed at a flat rate of fifteen percent, instead of the marginal tax rate on employment income. The maximum personal tax rate in the 2022 financial year is 45 percent. The outcome of salary sacrifice is that part of your salary is paid directly into your superannuation fund and the tax withheld is capped at fifteen percent. This means that for some salaried earners, an additional thirty percent of pre-tax salary is diverted to superannuation savings and not to the tax office. This simple strategy can accelerate the accumulation of retirement savings and is particularly useful to taxpayers with insufficient superannuation who want to address this situation.

Salary sacrifice represents a significant tax benefit and so the Government limits the amount of pre-tax income that can be diverted to superannuation under a salary sacrifice arrangement in any one year. The maximum amount that can be salary sacrificed in the 2022 financial year Is $27,500. This amount includes your employer’s Superannuation Guarantee payments.

Down-sizer contributions can be paid into a superannuation fund within ninety days of settling the house sale of a principal place of residence. The eligibility requirement is that you need to be at least sixty-five years or older when making a down-sizer contribution and the home must have been owned for more than ten years prior to the sale

The maximum downsizer contribution for each spouse is $300,000. The contribution cannot exceed the total sales proceeds of the house. If the home was registered in the name of one spouse, a down-sizer contribution may be made on behalf of the spouse that did not have an ownership interest.

TTR Income, as part of a Transition to Retirement Strategy (TTR), provides flexibility toward the end of your working life. This strategy addresses the often-stated criticism of superannuation that your money is ‘locked-away’ until ‘old age’. The TTR regulations allow a TTR pension to be received tax-free while you remain in the workforce.

From age 60, TTR pension payments are tax-free and from age 55 to 59, a TTR pension is taxed at your marginal tax rate, less a fifteen percent tax credit. The flexibility of a TTR pension is that from sixty years of age, you can continue to work and supplement your salaried income with a tax-free TTR pension.

Given that many Australians are living longer and the existing tight labour market, a TTR strategy should be considered in drawing up a retirement plan.

A Government Co-contribution of up to $500 is payable if you pay an after-tax contribution of at least this amount into your superannuation fund and your pre-tax income is less than $56,112. You must be less than seventy-one years old when making the eligible superannuation contribution to receive this benefit.

Nominated beneficiaries to receive your superannuation in the event of your death should be advised to your superannuation fund. This is because unlike your house and other assets, superannuation doesn’t form part of your deceased estate.

Bankruptcy remote is a term not often used in the context of superannuation, but it is worthwhile knowing that superannuation is an asset not available to creditors in bankruptcy. In practice this means that personal superannuation is an effective asset protection mechanism for anyone who may have sound commercial reasons to shelter a component of their wealth from creditors, in the event of personal bankruptcy.

Combining superannuation into a single account saves money on administration fees and saves time in managing your superannuation because it simplifies compliance issues necessary to derive optimum benefits from superannuation.

Superannuation is fundamental to building wealth for financial independence in retirement.

The rules are complex, but the tax concessions are too significant to be overlooked. A qualified financial planner is essential in developing a Retirement Plan, in which Superannuation is a core component of one’s overall retirement strategy.

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