23 October 2020
By Colin Lewis, Head of Technical Services, Fitzpatricks Private Wealth
More than $32 billion has been withdrawn from the superannuation system by people adversely financially affected by COVID-19.
Whilst most people who accessed their super desperately needed it to make ends meet in these hard times, many people took the opportunity to access their super—rightly or wrongly—under the new temporary early release arrangements.
Unfortunately, these early withdrawals will have a real impact on retirement nest-eggs.
For someone in their mid-twenties, the early withdrawal of $20,000 could mean the difference in superannuation savings at retirement at age 67 of over $100,000. Even for someone at age 50, it may mean a shortfall in retirement savings of over $35,000.
Once we get through the current economic climate, it will be important to rebuild—where possible—retirement savings.
Historically, most people do not take superannuation seriously until they are in the mid to late forties—even fifties—when retirement is on the distant horizon.
Until then, most salary and wage earners view their super as what their employer is required to contribute. That is, their superannuation savings come predominantly via the 9.5 per cent compulsory Superannuation Guarantee (SG) contributions employers must pay. Although the SG rate is legislated to increase to 10 per cent from 1 July 2021, there is considerable lobbying going on within the Morrison Government in the wake of the COVID-19 crisis to delay this increase yet again.
But this does not help those who are not employed or are self-employed.
For younger people, superannuation is not on their radar. Understandably, they have more important things to worry about and super is not a priority. They may have a HECS debt to pay off, a mortgage on their home, the costs of raising a family, school fees etc.
Superannuation is the most tax effective savings vehicle someone can invest in. It is head and shoulders above the next best investment structure, like a discretionary family trust and/or investment bond.
Even with the significant tax benefits of super, it is not until later in life when people are more established and financially secure that super enters their psyche.
The reason is the downside of investing in superannuation. The disadvantage of putting money into the superannuation system is it is locked up—‘preserved’—and cannot be accessed generally until retirement which could be decades away.
Regardless, there are a few simple things you could be doing with super—whether to get yourself back on track after a recent early withdrawal or just to save money.
First, there is the old adage—the sooner you start, the more you will have at retirement.
Albert Einstein is purported to have said that compound interest is man’s greatest invention. Whether or not he said it, there is no doubting the incredible growth potential of an investment when you earn ‘interest on your interest’ over a long period of time.
Many people when they get to retirement are either thankful they took the opportunity to start saving when they were young, or recognise that they should have started earlier and are now playing catch-up.
Unfortunately, for many young people ‘you cannot put an old head on young shoulders’.
Second, making a super contribution could yield the best guaranteed return on investment around.
If you are a low or middle-income earner and make a personal after-tax contribution to your super fund, you may receive an additional contribution from the government—called a co-contribution—up to $500.
To be eligible, you must be under age 71 (at the end of the financial year) and receive at least 10% of your total income from employment-related activities and/or carrying on a business.
If your total income is equal to or less than $39,837 and you make a personal contribution(s) of $1,000, you will receive the maximum co-contribution of $500. A 50 per cent guaranteed return on investment—you cannot get better than that. The maximum entitlement reduces progressively as your income rises until you will not receive any co-contribution once your income is $54,837 or more.
So, together with your own contribution, the government co-contribution is a great way to boost your superannuation savings—whether to top-up or get yourself going—and should not be overlooked no matter how young you may be.
Third, making a super contribution for your spouse—married or de facto—may allow you to claim a tax offset of 18 per cent of your contribution.
To be eligible, your spouse must be under age 75—they must meet the work test (40 hours of gainful employment in 30 consecutive days) or work test exemption from age 67—and earning a low income or not working.
If your spouse’s defined income is $37,000 or less and you make a $3,000 contribution for them, you are entitled to claim a tax offset of $540. The tax offset reduces when your spouse’s income is more than $37,000 and completely phases out when it reaches $40,000.
Even if you’re young, making a spouse contribution can be attractive as it bolsters your spouse’s retirement savings, you may receive a tax benefit along the way and it can be a means of funding your spouse’s insurance cover in super.
Finally, if you’re saving for your first home, don’t overlook the opportunity to fund your deposit in super as the money you put in together with associated earnings less tax is accessible when it comes time to buy that home. The First Home Super Scheme helps you save faster with the concessional tax treatment of superannuation. Whilst the tax benefit of saving in super will not fund your deposit, it may pay for your legal fees.
Under the scheme, the maximum amount you can contribute each year to your super fund is $15,000, with the maximum amount you can save under the scheme $30,000.
These are a few simple things you could do to boost your superannuation savings or get them back on track after a recent withdrawal. The added benefits which may come from making a contribution to super should not be overlooked even if your retirement is decades away.