Boosting your super contributions

Superannuation is still one of the best ways to accumulate savings for retirement. To make the most of your super, members need to be ‘super savvy’ and be aware of tax-effective strategies that can help boost their super and achieve their financial goals.

1. Review your super fund and insurance options to determine if it is the right fund for you. If you have ever had more than one job, it’s likely that you also have more than one super fund. Consolidating could lower your fees and make a big difference to your end balance.

2. Salary sacrificing is a great way to grow your super and minimise tax at the same time. Advise your employer to allocate a portion of your before-tax salary into your super account, which are only taxed at a maximum of 15 per cent.

3. Spouse contributions, where you contribute an amount to your partner’s super, can help reduce your family’s annual tax bill.

4. Be aware of the contributions caps. The Government recently made changes to the treatment of excess non-concessional superannuation contributions, which may affect how much you contribute each year.

5. Take advantage of Government co-contributions. Individuals who earn less than $49,488 per year and make a non-concessional contribution to their super are eligible for a Government co-contribution.

Self-managed super fund mistakes to avoid for EOFY

It is important for investors to have a good understanding of their SMSF to help reduce tax bills and maximise their wealth. To avoid being issued an SMSF audit by the ATO, investors should take the following advice on board:

– Read the trust deed to gain a better understanding of how the fund works.

– Have a regularly revised investment strategy, which takes into consideration liquidity, risk and return, diversification, meeting liabilities and insurance.

– Update binding death nominations to ensure that trustees pay the income and capital of the trust to intended beneficiaries.

– Utilise the transition-to-retirement pension if you’re still working and aged between 55 to 64. Any assets invested in a pension are free from capital gains tax and earnings tax. Also, investors will be able to reduce their mortgage and increase their tax-free contributions.

– Optimise contributions into the SMSF. Investors who turned 49 on June 30 last year are eligible to invest $35,000 into their fund and claim a deduction. The contribution limit remains $30,000 under that age. Self-employed members can contribute a lump sum, but if they are employed under a salary arrangement, they must have salary sacrificed that amount during the year.

– Submit SMSF tax returns on time.

SMSF and investing in property

While using a self-managed super fund (SMSF) to buy an investment property has become increasingly popular, members must carefully consider whether it supports their overall investment strategy before they go ahead with this investment approach.

There is a condition that the SMSF trustee or any of their relatives cannot buy the property with the intention to live in it. The sole purpose of using an SMSF to buy a property must be to build wealth for retirement. With this in mind, a member must buy an investment property for logical reasons and not because they are emotionally attached to it. The importance of the property’s return on investment outweighs the property’s views and facilities.

Before purchasing an investment property, a SMSF member must evaluate how long it will take them to repay the debt. Current rent rates and the level of superannuation payments made by members should provide an indicator of whether it will be paid off in time for retirement. Otherwise, they may need to factor in selling the investment at the time of retirement or putting off their retirement.

Members must also take into consideration that some investment properties are more suited to a SMSF, such as properties with low ongoing and maintenance cost and a high gross rental return. They should avoid buying investment properties with high ongoing maintenance cost as these will only increase unnecessary costs and reduce the net rental income.

Australians warned that $1 million superannuation may be insufficient

For some time now, superannuation experts have been warning Australians not to be distracted by the seemingly large size of their retirement nest eggs. While the total balance of many super accounts may sound impressive, it can distract from the reality of the income stream it is likely to deliver.

Between longer life expectancies, inflation, and low interest rates, retirement savings are not always delivering the expected retirement income. Obviously, a range individual circumstances will dictate how much an individual will need to cover their expenses in retirement. In particular, single retirees will tend to have significantly higher living expenses than those who are co-habitating.

Furthermore, the trajectory of interest rates is a determining factor in how a nest egg  will perform in pension phase. And, as we all know, accurately predicting the future of interest rates is an impossible undertaking.

Superannuation and life insurance

A lot of Australians are unaware of the fact that they probably have life insurance provided by their superannuation fund. Due to economies of scale, you are most likely getting a very good deal on your cover, and as such it pays to be aware of a few things that can impact your life insurance.

1. SMSFs need to consider the life insurance needs of their members. However, this does not necessarily mean that the SMSF needs to provide the insurance. A lot of SMSF trustees choose to keep some of their super invested in public funds in order to take advantage of the cheap life insurance.

2. You need to specify who you would like to receive your life insurance payout in the event that you pass away (you need to do the same for your superannuation). It pays to be aware that life insurance payouts to non-dependents tend to attract a hefty tax bill, whereas payouts to dependents are typically tax-free.

3. You can also access income protection insurance in your SMSF. Income protection insurance is especially important for people who have families or large debts (i.e. a mortgage).

Fund fees eating away at retirees’ cash

As interest rates plummet, retirees who are relying on interest from cash savings in their superannuation accounts may be losing out. The reason for this is that excessive fund fees can eat away at cash balances. Without decent returns from interest rates to offset these losses, the results for super funds can be grim.

Despite the fact that the Reserve Bank reporting that cash deposits in banks returned between 3.3%-3.7% in 2014, returns on cash deposits in super funds were hovering down at around 2.5%. For retirees, who so often elect to invest their super in cash for stability and a lower risk profile, this lower rate of returns can add up to significant losses.

You should always spend some time examining the fee structure of your superannuation fund and comparing it to similar funds. Do not be fooled by a fund that recently reported a year of high growth. To gain a comprehensive understanding of a fund’s performance, you should examine the returns from the past fifteen years, as there can easily be one-off flukes.

Salary sacrificing into your super

Salary sacrificing part of your income into your superannuation brings about a lot of financial benefits. Employers in Australia are required to contribute the equivalent of 9.5% of an employee’s salary into a nominated superannuation fund. On top of these contributions, employees can request that their employer reduce their salary and direct the additional cash into their superannuation.

There are a number of benefit to salary sacrificing into your superannuation:

1. Reduce your tax liability: Superannuation contributions are taxed at the low rate of 15% (or 30% for individuals earning over $300 000). Therefore, by making additional contributions from your before-tax income, you are likely to decrease your overall tax liability.

2. It won’t cost your employer anything: Your employer will not have to pay any fringe benefits tax on your additional superannuation contributions, so it shouldn’t be an issue for you to make an arrangement.

3. Compound interest! The more that you contribute to your superannuation early in life, the harder your money will work for you. Even a very small additional contribution each week when you’re young can make a big difference to the final size of your nest egg.

Savings strategy for over 55s

If you are over the age of 55 and are still earning income through employment, then you may be able to make significant tax savings using the transition to retirement scheme.

When you use the transition to retirement strategy, you have two superannuation accounts. One account receives your employer’s contributions and any additional contributions that you make (concessional or non-concessional). The other account is your retirement income account, where you place a portion of your savings and pay yourself a pension.

The advantages to this strategy are that you can enjoy the tax benefits of making contributions to your superannuation while drawing on a tax-free pension from your retirement income account. You can use the transition to retirement strategy to grow your nest egg or to reduce the number of hours that you work without impacting your income.

Superannuation balances boosted by international shares

Findings of a study conducted by research firm SuperResearch reveal that in 2014 investment in international shares provided superannuation accounts with impressive returns.

Superannuation funds reported an average 7.5% return in 2014, with international shares providing a significant contribution. The falling Australian dollar, which tumbled almost 8% against the USD last year, has also benefited super balances.

By contrast, the SuperResearch report found that investments in Australian shares had yielded modest returns, averaging just 1.4%.

Making your super last

When Australians reach retirement age, they have the option of withdrawing their superannuation as a lump sum or taking a pension that will be a reliable source of income for a number of years.

Taking out your superannuation as a lump sum can be incredibly tempting, especially if you reach retirement age with some debts that still need to be paid off. However, blowing through your superannuation is easier than you think. If you choose to withdraw a lump sum, then you find your superannuation is insufficient to fund a comfortable retirement.

Industry experts estimate that a single person needs an income of approximately $43 000 per annum to fund a comfortable retirement while a couple needs approximately $58 000. The age pension, at its current rate, only just exceeds half of these amounts.

If you are nearing retirement age, you should carefully consider your options when it comes to withdrawing your superannuation. If there is some reason that you need to make a lump sum withdrawal, for example, a daunting mortgage, then you may care to investigate a variety of strategies. Remaining in the workforce for an additional few years will boost your superannuation savings and the transition to retirement program offers over 55s some significant tax breaks.