Time to read : 5 Minutes
They say that Australia’s superannuation system is top-notch for retirement savings. But if you take a closer look, it’s earnings based.
And that means – as I’ve been saying for years – that it is inherently sexist. Or more accurately: it’s salary-ist. Which is closely related.
Let’s look at the problem… and the solution.
The problem with ‘she’ll-be-right-mate’ super
Most of us trust that our compulsory Aussie savings scheme is ticking away in the background of our busy lives and looking after our retirement. You know: ‘she’ll be right mate’.
The problem is that she might not be right. Because if you consider, women are more likely to take time off work to care for children, switch from full-time to part-time work for family life, then you can see how the gender pay gap widens over the years.
If steps aren’t taken to fix this, segments of the population – especially women – will miss out massively… because they simply don’t earn as much as others.
The superannuation guarantee contributions that an employer must pay are 11.5% of – you guessed it – salary.
Super represents a virtuous tax circle. The good news is that if you can’t get much money in by ‘virtue’ of the fact you don’t earn a decent amount of it, there are other options.
We’ll get to how to rectify the retirement nest egg problem shortly.
Firstly, here is why you want to get in the super shelter… that virtuous tax circle:
contributions to super are only taxed at up to 15% (note that’s probably lower than your income tax rate),
in there, your investments are only taxed at a maximum 15%, and
you can usually get your money out tax-free at 60.
The name of the retirement game for switched-on Aussies is to work the super system for maximum bottom-line benefit, particularly if the system is set up to penalise them.
And that’s in terms of getting money in and back out.
How can you rebalance the bias?
Sure, the amount you can contribute both before- and after-tax is capped, but you can also – if you’re smart – give yourself a huge super boost.
If you feel you’re ‘super challenged’, here are a few strategies that could be helpful… in the years you may be able to afford it.
The carry-forward rule
You can mop up as much as five years of unused pre-tax (concessional) contribution limit – that limit is $30,000 since July 1 2024.
Previously it was:
$27,500 between July 1 2021 and July 1 2024
$25,000 from July 1, 2017 to July 1, 2021.
Be aware: the limits include your employer super contributions.
The bring-forward rule
If you can afford to – and if you’re eligible – you can pay-in three times the amount of the annual after-tax (non-concessional) cap, in one go. This is $120,000 since July 1, 2024.
Important: you have to have less than $1.9m in your fund to pay in more after tax.
Downsizer super contributions
Later in life – or if you’re 55 or older – and if you downsize from a family home, you may be able to inject up to $300,000 from the sale of your home into your super.
There are also ways to get bonus bucks into your super or into your finances from super, too:
The government co-contribution
If you pay into your super $1,000 after tax, the government will chip in a free up-to $500. There are some conditions such as you need to be working in some respect, but earning less than $60,400.
The spouse contribution
If a spouse pays $3,000 after tax into the super fund of a no- or low-earning partner (less than $40,000 a year). The spouse can claim an 18% tax offset which is $540 a year.
How smart moves could save women and lower income earners
The government co-contribution and spouse contribution are especially good ways for families to even out balances and set up their nest egg.
Think of it as a way to repair the sad balance of someone who has, probably happily, been working hard raising children but not earning an income.
If one person in a relationship is lower paid than the other, you should be looking to avail yourself of the instant-money opportunity that is the spouse contribution every year.
For a $3,000 contribution – which in theory will grow far more over time – a $540 guaranteed tax discount is generous.
When both people are again working in paid employment and you (hopefully) find yourself more flush, mopping up your unused contributions for the last five years is also an extremely good option.
Your family should be working together as a super-generating – as well as parenting – team.
Regardless of whether you are in a family though, it’s extremely effective to mop up unused contribution caps when you can.
Bottom line
Our system might have $4trillion of our collective money in it. And super tax perks might cost the government $55billion in foregone revenue during the 2022-23 tax year alone. But women still retire with super balances 25% less than men.
It’s time to take action to tackle this. If you are in one of the groups that super systematically overlooks, you should seriously consider adopting a super strategy for your future nest egg.
Remember, the earlier you squirrel away money into super, the more it will grow. Thanks to the power of compounding, it’s easier and cheaper to do it early.
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