Make the most of extra contributions
Although contribution limits have been introduced, with a little advice you can substantially increase your benefit in the lead up to retirement.
It is recommended that you seek expert advice to maximise your financial plan. Telstra Super Financial Planning offers advice to members of Telstra Super at no additional cost. To make an appointment, call Telstra Super on 1300 033 166 or request an appointment online.
Post-tax super boost
Depending on your circumstances, you could be better off moving assets into super to position yourself to generate more tax-free income in retirement. Provided you are under age 65, you will be able to bring forward 2 years of post-tax contributions and make a lump sum contribution of $450,000 in one financial year. So if the $450,000 contribution was made in 2010/2011, no further post-tax contributions could be made until 2013/2014.
Candidates for this strategy are likely to be close to the current preservation age of 55 (so their investment won't be out of reach for a long period of time) and have assets outside of super worth more than $450,000 ($900,000 for a couple).
Get more income tax-free in retirement
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Jenny is aged 54 with a super balance of $100,000. To get the retirement income she wants, she needs around $500,000 in super. She has neglected her super in order to pay off an investment property. She decides to sell this property and after paying applicable taxes is left with $300,000 as a post-tax super contribution.
Now Jenny no longer has to make mortgage payments she can increase her salary sacrifice contributions into her super. And she has instantly boosted her super to provide an adequate tax-free income stream in retirement.
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Transitional pre-tax contribution limits
Until the end of the 2011/2012 year, the pre-tax cap will be $50,000 for persons aged 50, or who turn 50 during the period. With retirement just around the corner, making heavy salary sacrifice contributions could make up for lost time and could also represent a significant tax saving.
In the 2011 Federal Budget, the Government reaffirmed its earlier announcement of the permanent extension of the transitional pre-tax contributions cap for those over 50 with account balances of less than $500,000 from 1 July 2012.
Salary sacrifice to save
Michael and Jane are in their early 50s and are looking to significantly increase their super with the aim of retiring at 60. Michael currently earns $100,000 pa and his super balance is $300,000 and Jane earns $60,000 pa and has $100,000 in super. Currently their combined after-tax income is $120,050 pa. They have a share portfolio valued at $200,000.
With no other financial commitments apart from day to day living expenses, they decide to buckle down and salary sacrifice as much as they can into super and live off a combined after-tax income of $75,000 pa. To do this they:
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1. Sell their $200,000 share portfolio
The shares have a cost base of $50,000, leaving them a Capital Gain of $150,000. As the portfolio had been held longer than 12 months only half of the gain is taxable ($75,000). After the sale they each need to include $37,500 of the gain in their taxable income, which will be taxed at their marginal tax rate.
2. Salary sacrifice within Government limits
In the first year, Michael salary sacrifices $41,000 to super - all of which is taxed at 15%. His taxable income for the first year will be $96,500 ($37,500 capital gain and $59,000 salary not contributed to super). Jane salary sacrifices $44,600 to super. Her taxable income will be $52,900 ($37,500 capital gain and $15,400 salary not contributed to super).
Over the next 4 years Michael and Jane salary sacrifice up to the pre-tax contributions cap limit.
3. Share portfolio
Contribute the sale proceeds of the share portfolio to Jane's superannuation account.
4. Contribute surplus income
Their combined net income exceeds their cashflow needs and they equally contribute these amounts to their respective super accounts as post-tax contributions.
5. Watch their super grow
In adopting this strategy, after five years and based on an interest rate of 7% compounded annually, net of fees and taxes, Michael's super balance would increase to approximately $672,140 while Jane's super balance would be approximately $638,338.
The above example assumes no further withdrawals.