In many situations, superannuation is a very attractive investment vehicle because of its generous tax concessions. However, the rules seem very complicated and perhaps act as a deterrent to many people from actually taking advantage of the opportunities. The rules also have changed recently, adding to the confusion
We talked to Alan Baker, an Associate Director with Retirewell Financial Planning, and author of Investing Your Super: Tips, Traps and Tax Advantages, to understand some of those “tips and traps” in the newly revised edition of his book.
According to Alan, “Superannuation is a bit of a maze to most people and that is why I revised the book and we have produced a new edition. It’s in a question and answer format, so it is quick and easy to get relevant information.
“Superannuation is by far the best investment structure to create wealth over the long term and to minimise or eliminate tax for retirees. However, the complicated rules mean that investors still need expert advice and a personal plan suited to their unique circumstances and objectives to obtain the best results.”
Some of the areas the book covers are:
• How can I contribute to super?
• How can I access my super?
• When should I retire and how much do I need?
• How do I claim a small business CGT exemption through super?
• Should I set up a self-managed super fund?
• Should I implement a Transition to Retirement Pension strategy?
• How do I maximise any Social Security entitlements?
Although these topics are covered in the book, getting the right personal advice along the way could greatly enhance your end result. The book highlights dozens of tips and traps for the superannuation investor in its 27 chapters, so we asked Alan to outline some aspects of particular use to the over-50s. Alan is very clear that “planning ahead is the basic advice whatever the age group because the actions you take now and following proper procedure will influence your investment outcome.”
For instance, he cited the issue of salary sacrifice: “Sometimes, people do not realise that salary sacrifice arrangements have to be prospective in nature, that is the employee sacrifices a future entitlement salary for work not yet performed in return for super contributions of an equivalent amount. This means you cannot salary sacrifice payment for holidays or long service leave on leaving your job, as this is income to which you already have become entitled.”
“Another example is that before starting a pension income stream, it may be advisable to withdraw as much of the taxable component as you can tax-free as long as it can be re-contributed within the allowable non-concessional limits.”
“This will have the double advantage of maximising the taxfree percentage of the pension in order to minimise tax before age 60 as well as the death benefits tax paid by eventual non-dependent beneficiaries.”
An interesting aspect that Alan shared was how those over 65 can still qualify easily to make contributions to super: “Under the work test, some retirees between 65 and 75 arrange to be paid by their children for work that they might normally do for free, such as babysitting by grandma or home handyman duties by granddad.”
Given the extensive travel done by some retirees, another potential impact Alan highlighted is: “If you have a self-managed super fund and will be living overseas for more than two years, your fund could become non-complying, which would mean that the fund would lose up to 45% of its assets, and future earnings on what is left would be taxed at 45% instead of 15% or zero (in the case of a fund in pension mode).”
Procedural aspects and timing also can be very important as otherwise you may not be able to take full advantage of benefits and opportunities. A typical example cited by Alan is: “Before you start a pension or transfer or withdraw monies from a super fund, you must lodge a notice of intention to claim a deduction
for any personal concessional contributions in that financial year – otherwise, you will lose your tax deduction on those contributions.”
Superannuation rules are continually subject to change, so how would this impact carefully thought-out plans for the future? Alan has a pragmatic view: “Any future changes to super rules would be most unlikely to adversely affect retirees or those close to retirement age, as the new rules would have to be ‘grandfathered’ to be fair to those who already had made arrangements based on the current rules. It is likely that any adverse rule changes would be phased in gradually for pre-retirees, in the same way as recent increases in the preservation age and the age pension age.”
The ultimate message is that although superannuation is generally recognised as the best investment environment because of its tax concessions, the area is very complicated both legislatively and procedurally. The traps are many, so it is essential to get the right advice from an expert about your personal circumstances and options before setting down the superannuation investment path.
“Getting the right personal advice along the way could greatly enhance the end result”
Article Written by Alan Baker
A free copy of the book, Investing Your Super: Tips, Traps and Tax Advantages can be obtained by
contacting Retirewell @ www.retirewell.com.au