For many, the concept of superannuation can be drier than the Mojave desert. But that’s where appearances can be deceiving.
Superannuation is a versatile investment vehicle – there are a myriad of ways to contribute, receive contributions, or do both! Aside from creating a future benefit in the form of retirement savings, making a personal superannuation contribution may provide a financial benefit now, in the form of a tax deduction. And that’s a pretty sweet deal if you think about it – invest for your own future and save some tax too.
Building wealth through a self-managed superannuation fund may give additional flexibility in relation to investment options, plus provide the ability to purchase a property used to run a business.
There's a lot of rules which make superannuation complicated. Limits exist on the amount contributable that can enable a tax deduction. Presently, this is $27,500 annually. Contributions made after-tax where a deduction isn’t claimed can be made up to $110,000 annually, or if certain criteria met, two future financial years’ worth of contributions can be brought forward allowing $330,000 to be added.
Changes coming to super and what it means:
'Bring forward’ contribution and work test
Currently, ‘bring forward’ contributions can be made by individual aged 66 or under at the beginning of each financial year. On 1 July 2022, the age threshold will widen to 75 – and a work test no longer applies. This renewed ability for older Australians to contribute to their retirement futures is a new policy setting which is warmly welcomed, and long overdue.
Superannuation contribution limits do change periodically. While this won’t happen in the 2022-23 financial year, headwinds are picking up speed for this to occur in 2023-24. Should this come to pass, the scope for extra contributions will provide further opportunities to boost retirement savings.
Compulsory superannuation has been a feature of the Australian employment landscape since 1992 - albeit with some restrictions, which have slowly been remedied with the passage of time.
Superannuation guarantee increases
Presently, an individual earning less than $450 per month is exempt from having superannuation guarantee contributions made on their behalf. For those on low wages or who simply worked casually, these were retirement savings denied to them. Fortunately, times are changing. From 1 July 2022, this threshold will be abolished. Employers will then be required to make superannuation guarantee contributions irrespective of income earned. With the contribution percentage also rising to 10.5%, that’s a win for all employees!
Downsizer contribution
Finally, where an individual currently aged 65 or older sells their home – which must have been their main residence at some point – they can make a ‘downsizer’ contribution of up to $300,000 (or $600,000 per couple). The strategic value of this type of contribution is that it doesn’t count towards the annual caps highlighted above, nor is there any work test or upper age cap applied.
From 1 July 2022, further flexibility will occur by enabling those 60 or older to make a ‘downsizer’ contribution. And - contrary to its actual name - there is no requirement for the next home purchased to be smaller in any way. ‘Downsizer’ contributions are great news for individuals who move home later in life and still want to consider the possibility of topping-up their superannuation with any surplus funds.
The optimal way to maximise superannuation contributions will differ from person to person, and is where the value of bespoke financial advice begins to shine.