- 1. Set a date for your retirement, even if you change it later
- 2. Make a plan – do nothing, do a little or do heaps
- 3. Focus on 3 key factors to super success – long-term investment earnings (after fees and taxes), super contributions and lower tax
- 4. Calculate how much you pay in fees
- 5. Change investment options, if necessary
- 6. Change super funds, if necessary
- 7. Consider making concessional (before-tax) contributions
- 8. Consider making non-concessional (after-tax) contributions
- 9. Check if you’re eligible for a co-contribution
- 10. Fully appreciate the tax advantages available with super
Note: This is the second article in a special two-part series that SuperGuide updates regularly, designed to help SuperGuide readers plan for retirement. This article, and the first article in the series, Super checklist: 10 ways to save your super (link also appears at the end of this article), is accompanied by links to more than 60 supporting SuperGuide articles. The two articles are regularly updated to reflect the latest super changes, and the latest rates and thresholds.
For Australians with superannuation accounts, the many super changes announced in the May 2016 Federal Budget, and taking effect from 1 July 2017, may have created general uncertainty about the future of your super benefit, and perhaps even stress about your retirement plans. You may be wondering whether you will have enough money to retire now that the government has cut the contributions caps, and placed a cap on the amount of super you can transfer into a superannuation pension account.
Although it is tempting to ignore your super and retirement plans when the government constantly tinkers with the rules, now is the perfect time to review and/or reset your superannuation and retirement strategies. By reading this article, you can discover many ways you can boost your super savings while we endure the current government’s obsession with fiddling with the super rules.
Note: The average annual median return over the long-term (24 years) for a balanced/growth superannuation investment option is hovering around 7.4% a year, notwithstanding the Global Financial Crisis of 2008 and 2009, and the tech bust of 2002 (for more information on this long-term return see SuperGuide article Investment performance: 24 years of SG delivers 7.43% a year). The expected median return for the 2016/2017 year is likely to be positive, but with the current volatile investment markets, the final outcome is difficult to predict. (Median return means the return delivered by the investment option in the middle of a list that starts with the balanced/growth investment option with the lowest return and ends with the balanced/growth investment option with the highest return. Note that the super fund achieving the median return each year may differ from year to year.)
Super tip! If you’re concerned about how the latest super changes affect your retirement planning for the 2016/2017 year, then check out our popular SuperGuide article Superannuation checklist: What rules apply for the 2016/2017 year?
Why not bite the bullet and transform your financial future? Continue reading to discover 10 more ways to boost your super.
1. Set a date for your retirement, even if you change it later
Setting a deadline can be a big motivator for getting your retirement plans in order. You have a timeline target, which can help drive your strategies for boosting your super, or for working out whether your retirement date is too early, or not early enough! Setting a retirement date also helps you work out your savings target for your retirement, and for how many years your money needs to last after you finish working. A few scenarios to consider include:
- Retiring before your preservation age. If you retire before your reach your preservation age, you generally cannot access your super. You must rely on your non-superannuation savings only. In normal circumstances, you need to reach your preservation age AND retire, to access your super savings. Your preservation age depends on your date of birth. For those born on or after 1 July 1964, you won’t be able to access your super savings until you turn 60 years of age (your preservation age). For those born before July 1960, your preservation age is 55 years. For those born after June 1960 and before July 1964, your preservation age could be 56, 57, 58 or 59 years. For more information on preservation age see SuperGuide article Accessing super: What is my preservation age?
- Retiring before the age of 60. If you plan to retire before the age of 60 (but after you have reached your preservation age, and that option assumes you were born before July 1964), you can have access to your super benefits but you will probably have to pay tax on those super benefits. Importantly, you won’t have access to the Age Pension until at least the age of 65, and many Aussies won’t have access to the Age Pension until age 67. For more information on the tax implications of taking super benefits before the age of 60 see SuperGuide article Retiring before the age of 60: the tax deal from 1 July 2017, and for working out when you can claim the Age Pension see SuperGuide article Age Pension age increasing to 67 years (not 70 years).
- Retiring after the age of 60 but before 65. If you’re male or female, and retire before the age of 65 (or an older age, such as 65.5 years or up to 67 years, if you were born after a certain date), you won’t have access to the Age Pension. The compelling case for retiring on or after the age of 60 however, is that your superannuation benefits are tax-free (except if you receive benefits from untaxed public sector super funds). For more information on retiring on after the age of 60, see SuperGuide article Tax-free super for over-60s, except for some (from 1 July 2017) and for information on the impact of retiring before you’re entitled to the Age Pension see SuperGuide article How much super do you need to retire comfortably?
- Retiring on or after the age of 65. At this age you can access your superannuation benefits with no restriction, and if you’re born before 1 July 1952, then you’re eligible for the Age Pension from the age of 65 (subject to meeting income and assets tests). For more information on Age Pension entitlements see SuperGuide article Age Pension: 20 March 2017 rates now apply (until September 2017) and for information on super and retirement on after age 65 see SuperGuide articles Tax-free super for over-60s, except for some (from 1 July 2017) and What are the super and retirement rules for over-65s?
- Never retiring. If you wish, you can keep your money in superannuation indefinitely and never withdraw it, that is, keep your super savings in accumulation phase. The earnings within your super fund will however continue to be taxed at 15%. If you start a superannuation pension at any time, then your fund earnings on assets financing the pension will be exempt from tax. Alternatively, you can withdraw your super on or after the age of 65 and never stop working. For more information on the tax treatment of superannuation money in accumulation phase and pension phase see SuperGuide article Super for beginners, part 15: Super tax – as easy as 1-2-3.
2. Make a plan – do nothing, do a little or do heaps
Thinking about boosting your superannuation savings doesn’t mean that you have to make radical changes to your life or lifestyle. The earlier you start thinking about your retirement plans the less likely that you will have to make any significant changes to your current lifestyle. In short you have 3 options:
- You can do nothing. Even when you think you’re doing nothing, there’s a strong possibility that half of your retirement saving challenge is already sorted. If you have a job, turning up for work means that your employer is making super contributions on your behalf. For more information on compulsory employer super contributions (known as Superannuation Guarantee) see SuperGuide article Superannuation and employees: 10 facts about your super entitlements
- You can do a little. Even if you’re not quite ready to do any full-blown retirement planning why not try my six-step retirement planner – see SuperGuide article Retirement planning in six steps
- You can do heaps. After using our six-step retirement plan you may discover that there is financial gap between what you want and what you will have in super savings when you retire, if you continue what you’re currently doing. Keep on reading for tips on some of the straightforward strategies to consider, to bridge that financial gap.
3. Focus on 3 key factors to super success – long-term investment earnings (after fees and taxes), super contributions and lower tax
The 3 main reasons that superannuation is the most popular retirement savings vehicle, and consequently usually accumulates retirement savings faster than non-superannuation vehicles, are:
- Long-term investment earnings. You cannot access your super account until you reach a certain age which means your super savings are accumulating and compounding over a long period of time, assuming, of course, that your super fund is delivering strong long-term returns. Do you know your super fund’s investment performance over 1 year, 3 years, 5, 7 or 10 years? You can find out your super fund’s long-term investment performance by checking out your super fund’s annual report, or your super fund’s website. You can compare your super fund’s returns against the top-performers listed in the SuperGuide article Mirror, mirror… what super fund is the best-performing fund of all?and SuperGuide article Investment performance: We’re the best super fund. No, we’re the best… (go to Tips 5 & 6 if you’re unhappy with your super fund’s investment returns).
- Super contributions. Your employer is required to contribute the equivalent of 9.5% of your earnings to your super fund each year, and this percentage will eventually increase to 12% by 2025. You can also take advantage of tax concessions if you choose to make voluntary super contributions (see Tips 7 & 8)
- Lower taxes. The Australian government rewards you with incentives if you save for your retirement using a superannuation account. The general deal is that you must keep your super benefits in your super fund until you retire, and in return your super account pays a maximum tax rate of 15% on fund earnings. Super contributions are taxed at 15% (and for very high-income earners, 30% tax), which makes voluntary super contributions attractive for anyone paying more than 15% in income tax. When you retire after the age of 60, your lump sum payment and/or pension income is tax-free (see Tip 10 for more information and also SuperGuide article Super for beginners, part 15: Super tax – as easy as 1-2-3).
4. Calculate how much you pay in fees
Every superannuation fund deducts fees for running the fund. The fees may be administration fees, investment management fees, adviser fees, and even withdrawal fees (when you take money out of certain super funds). Other charges against your super fund account include insurance premiums and taxes.
Along with investment performance, super fund fees can have a huge effect on the size of your final retirement benefit. Check out what fees your super fund charges (see SuperGuide article Comparing super funds: 10 fees and charges you need to know about), and then compare against the fees charged by the cheapest super funds in Australia in the SuperGuide article Super fees: Top 10 cheapest funds in Australia.
Note: You may be receiving other services that justify your super fund charging higher fees, so do your research first before choosing to leave a super fund. The rule of thumb is that if a super fund charges considerably more than 1% of your account balance in total fees, it is generally considered a high-fee super fund. Over a 30-year period, a super fund that charges 2% in fees, will reduce your final retirement benefit by 20% compared to another super fund that charges 1% in fees, assuming investment performance, insurance charges and taxes are equal.
5. Change investment options, if necessary
If you’re unhappy with the investment performance that your super fund delivers, or you’re unhappy with the fees that your super fund charges, you don’t always have to change super funds to solve the issue. If you haven’t actively chosen where your super money is invested, your super money will automatically go into a default investment option.
The most common default investment options available in super funds are the balanced or growth options. Typically (but not always), the balanced option invests 60 to 70% of your money in growth assets, such as shares and listed property, which generally cost more to manage than the more conservative assets such as cash and fixed interest. A typical growth investment option can have up to 80% in growth assets.
If you decide that one of the strategies to boost your super savings is to change investment options, and you, say, move to more conservative, and cheaper investment options, then over the longer term, you can usually expect lower returns (even though in the not-too-distant past, conservative options did relatively well compared with the growth options). If you move to a higher growth investment option, hoping for better returns, then note that your returns from year to year may be volatile.
For more information on comparing investment performance, see SuperGuide article Super for beginners, part 20: Comparing your super fund’s performance and for what to consider when changing investment options within a super fund, see SuperGuide article Super control: How to switch your super account’s investment option.
6. Change super funds, if necessary
Changing superannuation funds can be a bit of a hassle, but if you’re not happy with your super fund and you can find a super fund that delivers you better long-term performance than your current super fund (and you believe the alternative fund’s past performance is going to continue in the future), and this alternative super fund charges reasonable fees, and also offers cost-effective life insurance, then changing super funds may be a worthwhile option.
Choosing a super fund that delivers decent long-term investment returns and charges competitive fees can substantially boost your final retirement benefit with very little disruption to your current lifestyle. For more information on how to compare super funds see SuperGuide article Fund choice: Comparing super funds in 8 steps.
7. Consider making concessional (before-tax) contributions
Regular super contributions can rapidly boost your final retirement benefit. You can make two types of super contributions – concessional (before-tax) contributions and non-concessional (after-tax) contributions – and each type of super contribution is subject to an annual cap. I explain non-concessional contributions in Tip 8.
Concessional (before-tax) superannuation contributions include employer’s compulsory contributions (Superannuation Guarantee), additional employer contributions (if applicable), salary sacrificed contributions, and personal tax-deductible contributions.
The annual concessional contributions cap for the 2016/2017 year is $30,000 for Australians aged 48 years or under on 30 June 2016. The concessional cap for older Australians is $35,000 for Australians aged 49 years or over on 30 June 2016. From 1 July 2017, the concessional cap drops to $25,000 for all age groups. The following SuperGuide articles explain how you can take advantage of the concessional contributions cap:
- Super concessional (before-tax) contributions: 2016/2017 survival guide
- Salary sacrificing and super: 10 facts you should know
- Who can make tax-deductible super contributions?
- Superannuation and employees: 10 facts about your super entitlements
- Super tax refund for lower-income earners extends beyond June 2017
- Employees can make tax-deductible super contributions from July 2017
8. Consider making non-concessional (after-tax) contributions
When you make a super contribution from after-tax dollars, you are making a non-concessional super contribution. The annual cap for non-concessional (after-tax) contributions is $180,000 for the 2016/2017 year, but drops to $100,000 from the 2017/2018 year. Note, that if you’re under the age of 65, then it is possible to make up to 3 years’ worth of non-concessional contributions in one year ($540,000 for 2016/2017 year, and $300,000 from the 2017/2018 year), using the bring-forward rules. The following SuperGuide articles explain non-concessional contributions in more detail:
- Your 2016/2017 guide to non-concessional (after-tax) contributions
- Bring forward rule: 10 facts you should know
- New $100,000 cap: Cut to non-concessional contributions cap
- Non-concessional contributions: 10 facts about new $100,000 cap
Note: If you are a small business owner you may be eligible for a $1.415 million after-tax contribution limit for the 2016/2017 year (indexed each year), which is a lifetime contribution limit, in addition to the non-concessional contributions cap. For the 2017/2018 year, the lifetime limit increases to $1.445 million. This ‘capital gains tax’ exemption permits personal contributions resulting from the disposal of qualifying small business assets. If you believe that you may be eligible then seek independent advice because the rules that apply to this exemption are complicated.
9. Check if you’re eligible for a co-contribution
The federal government is giving away money to anyone who makes a non-concessional (after-tax) contribution to their super fund, and who earns less than $51,021 a year (for the 2016/2017 year), and earns less than $51,813 for the 2017/2018 year. The tax-free giveaway is officially called the co-contribution scheme, and involves the federal government giving you a tax-free co-contribution when you make a non-concessional contribution, and you satisfy certain conditions. That’s tax-free money and effectively free money of up to $500 a year (although half of what it used to be) so why not check out if you’re eligible. For more information on the co-contribution scheme see the following SuperGuide articles:
- Cashing in on the co-contribution rules (2016/2017 year)
- Super contributions: How much co-contribution will I get?
10. Fully appreciate the tax advantages available with super
If it were not for taxation, superannuation would not exist. You would simply invest in your own name. Superannuation is taxed at lower rates to encourage people to lock their money away for retirement. You can save thousands of dollars in tax, and increases your retirement savings by tens of thousands of dollars by knowing your way around super’s tax incentives, such as:
- When you or your employer make super contributions, but watch out for the dreaded excess contributions tax (although you can now withdraw excess contributions)
- When your super fund makes money on investments on your behalf
- When your super fund pays you a pension or a lump sum
- If you die, and your family inherit your super benefits
For more information on the tax advantages available with super see the following SuperGuide articles:
- Super for beginners, part 17: Four must-knows about super’s tax rules
- Super for beginners, part 15: Super tax – as easy as 1-2-3
- Managing capital gains tax with super contributions
- Salary sacrificing and super: 10 facts you should know
- Concessional contributions caps: 10 facts you should know
- Retirement: 3 ways of taking super benefits before the age of 60
- Tax-free super for over-60s, except for some (from 1 July 2017)
- Superannuation after-life: Dear Dad, Tax for everything
- Super for beginners, part 8: What happens to my super benefits when I retire?
- Burden for retirees: Monitoring $1.6 million transfer balance cap
The 10 more ways to boost your super, listed above, provide you with some tools to help you grow your superannuation.
The first article in this 2-article series is Super Checklist: 10 ways to save your super.