By Graeme Colley
It is common knowledge that women will retire from the workforce with substantially less super than their male counterparts. They find it more difficult to attain financial security in retirement as it is expected they will end up having around half of what a male retires on. But is there a way in which the super balances of can be evened out for a couple or to boost the super savings of a single woman?
The over-arching rule with superannuation is that the earlier superannuation savings start the greater amount the amount accumulated for retirement due to things like compound earnings and the longer time to accumulate wealth for retirement. So, a slow burn in making contributions to super will reap benefits rather than trying to cram super in as near to retirement as possible. The earlier contributions are made to super, a greater the proportion of the final benefit will be made up from investment earnings rather than contributions.
To get down to specifics, boosting superannuation savings can come from making tax deductible concessional contributions and non-concessional or non-deductible contributions to super. Concessional contributions include employer superannuation guarantee contributions, salary sacrifice contributions or as personal deductible contributions. There is a limit to the amount of concessional contributions you can make without incurring a tax penalty. The limit for the total amount of concessional contributions for this financial year is $25,000 and for the 2021/22 financial year it will be increased to $27,500.
Non-concessional contributions include personal contributions which are not tax deductible and may be made by you or your spouse. There are limits to the amount of non-concessional contributions that can be made but it depends on the total amount you have in super as at 30 June in the previous financial year. Providing your total super balance is than $1.6 million on 30 June you can make non-concessional contributions without penalty. However, the $1.6 million cap is to increase to $1.7 million for next year, but you will need to have a total super balance less than $1.7 million on 30 June 2021 to make non-concessional contributions within the limits.
For this financial year it is possible to make non-concessional contributions of up to $100,000 and from 1 July 2021 the cap increases to $110,000. For anyone under age 65 it is possible to use a bring forward contribution rule which allows up to three year’s non-concessional contributions if you qualify.
So that’s the rules when concessional and non-concessional contributions are made to super but how does it work if a couple wish to even out their super balances? The first thing required is a plan because evening out super balances won’t happen overnight.
The most useful strategies to even out a couple’s super benefits are spouse splitting concessional contributions and spouse non-concessional contributions. Part-time workers, lower income earners and women out of the workforce can benefit where couples work together and keep their super account balances growing together - even if one person is on a low income or not working.
For couples who are at least 65 using the downsizer contribution may help even out super balances.
Splitting concessional contributions to a spouse are usually made in the year after the contributions have been made to the fund. The concessional contributions could include super guarantee contributions, salary sacrifice contributions or personal concessional contributions. The amount transferred to the spouse’s account is limited to 85% of the concessional contributions made by the
spouse for a year and limited to the splitting spouse’s concessional contributions cap for the financial year.
Judi’s concessional contributions for the 2020/21 financial year were $25,000 which were made up from her employer’s super guarantee contributions and personal concessional contributions. In July 2021 she decides to split all of her concessional contributions to her spouse, Steve, who has a lower super balance. This will allow her to split 85% of her concessional contributions ($21,250) to him during the 2021/22 financial year.
Judi will need to notify her super fund of the amount she wishes to split on a form which is available from her fund or the ATO’s website.
There are some other limits on spouse splitting contributions as they can only be split to a spouse who is under 65 and has not retired if they are older than their preservation age (currently 58).
If the spouse who is splitting the contributions is rolling over, transferring or withdrawing all of their superannuation balance any splitting application must be made before one of those events has occurred. This may allow the split to take place during the year in which the concessional contributions were made to the fund rather than in the year after they were made.
Non-concessional contributions can be made for an eligible spouse which are counted against the spouse’s non-concessional contributions cap. If the spouse has an adjusted income of less than $37,000 it is possible for the contributing spouse to receive a tax offset of up to 18% on the first $3000 of the contribution made for their spouse. The tax offset amount phases out between $37,000 and $40,000 on a dollar for dollar basis.
Until 30 June 2020, it was only possible to make spouse contributions up until age 70. If the spouse was between 65 and 70 a work test of 40 hours in 30 consecutive days was required during the financial year in which the contribution was made. However, since 1 July 2020 it was extended to apply up until the spouse reaches 75, providing the work test is met after the spouse is 67. There is no work test to be met for spouse contributions to be made prior to the spouse’s 67th birthday.
Ravi is 54 and has a balance in his super fund of about $1.5 million. His spouse, Aesha has just turned 50, is not working and has a balance of $900 k in her super fund. To help even out their superannuation balances Ravi makes a spouse non-concessional contribution to Aesha’s super fund of $100,000 to build her balance to $1 million.
As Aesha is not working and not receiving an income, Ravi will qualify for a spouse contribution tax offset of $540 which is equal to 18% of the first $3,000 of the non-concessional contributions he has made for her.
Downsizer contributions Downsizer contributions can made after the sale of a person’s main residence, as described for capital gains tax (CGT) purposes, which they have owned for at least 10 years. To be eligible the person, including a member of a couple, must be 65 or older and a contribution of up to $300,000 can be made within 90 days of the property settlement. The person’s spouse may also be eligible to contribute up to $300,000 if they are 65 or older. There is no upper age limit applying to downsizer contributions or any work test that applies.
Annette and James are both 67 and have just sold their family home so they can make a tree change and move to the country. They are purchasing a property in a country town and expect to have about $350,000 left over. Annette has a super balance of about $1.5 million and James has a super balance of about $1 million.
As they qualify for the downsizer contribution they decide that $300,000 from the sale of the family home will be made to James’ super fund and $50,000 will be made to Annette’s super.
With proper planning it is possible to even out super balances. The main benefit is that it may allow couples to increase the combined amount they have in super and allow them to maximise contributions and benefits in their fund.