Australia’s $3 trillion superannuation system is largely framed around the long-term retirement needs of individuals.
Current legislation doesn’t allow couples to have joint member superannuation accounts, reflecting the various complexities around existing aged-based superannuation access rules and how they be applied across combined retirement assets.
That’s a work in progress, with various industry players having recently lodged submissions with the Federal Government recommending that married and de facto couples be enabled to blend and access each other’s superannuation savings.
Yet, what’s often overlooked by couples is the fact they already have the ability to transfer superannuation savings between themselves. This can be done under contributions splitting allowances that are regulated by the Australian Tax Office.
Used strategically, superannuation contributions splitting can produce major financial gains for couples over the long term.
The benefits of super splitting are most powerful around retirement, when couples are able to take advantage of tax-free lump sum withdrawals, and if one person is several years older than the other.
And recent changes to retirement legislation, such as the introduction of the $1.6 million pension balance cap and a five-year concessional contributions catch-up allowance, mean there are even more incentives and opportunities for couples to work together on their superannuation rather than separately.
Before getting into the granular details, here’s a general explainer of the contributions splitting rules.
How splitting works
The full guidelines around splitting, including eligibility and how to apply, are available on the ATO website.
On a basic level, the ATO allows couples to split up to 85 per cent of their annual 9.5 per cent employer concessional contributions, as well as additional salary sacrifice and personal super contributions. But any splitting of contributions must be done following the end of the financial year in which the super contributions were made.
Splitting can be done at any age, but a spouse must be either less than their applicable preservation age or between their preservation age and 65 years, and not retired.
Those wanting to split contributions need to first check whether their super fund allows it, and then download an application form from the ATO website.
Getting a better super balance
Couples often end up with vastly different superannuation account balances for various reasons, such as if one partner has stopped work to raise a family.
But contributions splitting isn’t necessarily about evening up a couple’s super balances. On a more holistic level, it’s more often about using contributions to maximise retirement outcomes further down the track.
Accessing an Age Pension
Long-term planning is the key with contributions splitting, especially when there is a large age gap between spouses.
When an individual reaches age pension age (currently 66) their superannuation balance becomes an assessable asset (along with other assets) for Age Pension calculation purposes. On the other hand, the superannuation of a younger spouse isn’t yet accessible.
If the older spouse’s assessable assets are below the pension assets test thresholds, they could be entitled to a part of full Age Pension.
The pension rules are very complex, and outcomes depend on a range of factors, but assuming an older spouse meets all the rules there could be a substantial benefit in splitting their contributions to their younger spouse over time so the older partner can qualify for a government pension.
Even if this is just a temporary financial benefit until the younger spouse reaches pension age, it could still be substantial over a number of years.
Tax-free lump sum withdrawals
Another example of maximising contributions splitting outcomes is the tax-free lump sum super allowance.
Any person reaching their preservation age is currently able to withdraw up to $210,000 from their super account as a tax-free lump sum.
Contributions splitting comes into play when one spouse is likely to end up with substantially more than the lump sum maximum level at retirement and the other will be well short.
By working together over time a couple can ensure that they both have at least the maximum lump sum withdrawal amount in their respective super accounts by their preservation ages, which would enable them to collectively withdraw up to $420,000 tax free.
The $1.6 million pension cap
The Federal Government’s recent move to cap the amount of funds that can be held in a tax-free pension account at $1.6 million represented one of the biggest changes to the superannuation system in years.
Those with more than $1.6 million must transfer any excess into a superannuation accumulation account and pay 15 per cent tax on earnings.
In a situation where spouses have very uneven super balances before retirement, and where one could breach what’s known as the transfer balance cap, it makes sense to use contributions splitting to keep the spouse with the highest super balance below the cap.
If super splitting becomes part of a couple’s ongoing financial strategy, starting as early in the relationship as possible, such a strategy could ensure both partners can keep their pension account balances below the mandated cap and thereby receive higher tax-free income.
The super catch-up rules
As detailed above, the contributions splitting rules allow couples to effectively move 85 per cent of their Superannuation Guarantee, salary sacrifice and personal concessional contributions from one partner to another.
Individuals are able to put $25,000 per annum in concessional contributions (taxed at 15 per cent) into their super account.
But behind the annual concessional limits are newly introduced catch-up rules allowing individuals with total superannuation balances below $500,000 on 30 June of the previous financial year to carry forward their unused annual allowances, on a rolling basis, for five years.
The five-year carry-forward period started on 1 July 2018, so the 2019-20 financial year is the first one where individuals can make extra concessional contributions if they didn’t make a full $25,000 concessional contribution in 2018-19.
And this will enable couples to potentially split even higher amounts from this financial year on, based on them being able to transfer up to 85 per cent of their eligible super payments.
The importance of advice
Contributions splitting is a powerful strategy that can have substantial financial outcomes for couples.
But it is complex and needs to be considered as part of a couple’s broader long-term investment strategy towards retirement.
There are a range of elements that need to be factored in, not the least being Government legislation around superannuation limits, Age Pension entitlements and potential tax implications.
So it’s important for couples to seek out professional financial advice, preferably as early as possible, to ensure they get the maximum benefits out of contributions splitting.
Please contact us on 02 65459935 if you seek further discussion on this topic.
Reproduced with permission of Vanguard Investments Australia Ltd
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