CASE STUDY: Getting Money Into Super
There are many ways of building your super balance, each subject to rules and limitations on how they operate. Pathfinder can provide a prime strategy to guide you through the maze of possibilities.
There are many avenues a person can follow to build up their super balance. Each has accompanying rules and associated parameters that must be followed. Let’s list some of them here:
- Superannuation guarantee;
- Personal super contribution, including salary sacrifice;
- Catch-up concessional contributions;
- Non-concessional contribution;
- Non-concessional contribution using the bring forward rule;
- Spouse contribution;
- Super contribution splitting.
There are other rules that may assist in improving your outcome including:
- Starting an account based pension on retirement before age 60 – taking advantage of a tax free lump sum;
- Super balance not counted towards the age pension until age pension age.
In addition, many of the parameters that govern what can be done are indexed over time. Keeping track of and updating and remembering the details of these various schemes can be very daunting. However, Pathfinder will automatically alert you to and take advantage of any schemes that are applicable in a particular case. We illustrate this with the example below.
We have assumed in the analysis:
- Pension fund returns 4.4%pa;
- CPI 2.5%pa;
- AWOTE 3% pa;
- Base annual living expense $62,000 indexed at CPI.
Peter is 52 and Julie 44. Peter works full-time currently earning $92,000 pa while Julie works part-time on a salary of $29,000 pa. Historically, both salaries have increased in line with AWOTE and this is expected to be the case in future. Julie would like to retire at age 60 while Peter plans to work until age 65. Their superannuation balances are Julie $230,000 and Peter $490,000. In this example, we don’t allow for spouse contribution splitting. Our focus here is not so much on the actual results but to illustrate how Pathfinder can assist in developing strategies.
The primary objective used in Pathfinder is to maximise total wealth at the end of the analysis period.
Pathfinder calculates Julie’s best strategy each year to be:
- Reduce taxable income to $20,542 by making voluntary pre-tax super contributions to go with her super guarantee payments.
- Her personal income tax is then $445, which is nullified by the maximum low income tax offset of $445. She thus pays zero personal income tax.
- Julie’s concessional super contributions attract a tax of 15%, but because her income is below $37,000 she receives a low income superannuation tax offset to a maximum of $500.
- Julie still pays some contribution’s tax at 15% but this is below the rate of 19% (plus Medicare levy) that she would be paying in personal tax.
- Julie makes non-concessional contributions of at least $1,000 each year to super for which she receives a government co-contribution of $500.
- Julie makes non-concessional contributions each year of any funds remaining.
- Julie is also able to build up her super balance by receiving a spouse contribution from Peter of $3,000 each year.
What is Peter’s strategy:
- Peter makes a voluntary pre-tax contribution each year that, along with his super guarantee, takes his total concessional contribution to the maximum allowable (currently $25,000).
- Peter also makes a spouse super contribution to Julie of $3,000 for which he receives a tax rebate of $540.
- As a long term consideration, Peter does not make any non-concessional contributions.
The age pension age for both Peter and Julie is 67. Because of their age difference, Peter reaches this age in 2031/32 and hence becomes potentially eligible for an age pension, while Julie does not reach 67 until 2042. As mentioned above, any funds held in a person’s accumulation account is not counted towards the age pension tests until that person reaches age pension age. Therefore, there is an opportunity for Peter to receive or increase his age pension by transferring super money to Julie. Pathfinder provides guidance on how he could do this.
Figure 1 shows how Julie is able to utilise lump sum withdrawals by Peter to make a series of non-concessional super deposits
Julie makes three large non-concessional super deposits from 2028/29 to 2031/32. Of course in doing this there are rules that must be obeyed.
The strategy is this:
- Make a contribution of a little in excess of the expected one year cap of $130,000 in 2028/29 thus activating the 3 year bring forward rule. This restricts contributions to a total of $260,000 in the next two years.
- In the following year make a contribution of $1,000 so as to get the government co-contribution.
- Then in 2030/31 make a contribution of $259,000 to fully utilise the bring forward cap.
- Julie is now able to again use the 3 year bring forward rule by making a contribution of $448,000 in 2031/32. Note that the expected one year cap has increased to $150,000.
- She keeps in reserve an unused cap amount of $2,000 so that she can make contributions of $1,000 in each of the following two years to get the government co-contribution.
- After 2033/34 Julie’s total superannuation balance is projected to exceed the then expected general transfer balance cap of $2,300,000 so she is no longer eligible for the government co-contribution.
At age 60 and retired, Julie is able from 2033/34 onwards to make tax free lump sum withdrawals from her super account to help meet annual expenses. After turning 67 in 2042, Julie can commence an account based pension since there is no longer any purpose in keeping her funds in the accumulation phase. Note that at the end of our analysis in 2037, Julie’s projected super balance at $2.4 million is below the projected Transfer Balance Cap of $2.5 million in that year, so Julie is not restricted in the amount of funds that she can transfer to her pension at that time.
In practice, the future outcome is uncertain so Peter and Julie would be continually re-assessing their strategy and make adjustments as necessary, particularly as Peter approaches age pension age.
Figure 2 shows the government pension payments received by Peter. Although the numerical values are not easily discernible on the figure, they are around $15,000 in 2032/33 thereafter increasing from $26,000 to $29,000.
Of course there is a trade-off in that Julie pays 15% tax on the earnings in the accumulation phase but would pay no tax on earnings in the pension phase. So how much is foregone there? If we take 2034/35 as a representative year when Peter turns 70, we find his projected age pension is $27,000. Now Julie is projected to have $2,194,000 in super at that time. Our assumptions for investment returns on a balanced fund are 5.04% pa in super mode and 5.8% pa in pension mode i.e. a difference of 0.76% pa. So Julie is forfeiting around $17,000 pa in investment income. Therefore, there is approximately a net gain of $10,000 pa for 7 years in following the strategy. We can confirm this by conducting an analysis where the strategy is optimised in the absence of the age pension.
Finally, we can observe that to implement this strategy nothing particularly special needs to be done until 4 years before Peter would commence receiving the age pension. Therefore, an assessment could be conducted at that time to determine if the strategy is worthwhile given their investment outcome over time and the government policy settings.
In the example, we have provided an illustration of two separate but related issues. The first is how can you utilise in the most effective manner the various schemes for getting money into super. The second issue is are there any strategies for maximising age pension outcomes once age pension age is reached. Use of Pathfinder can alert you to the various possibilities.