Superannuation Strategies for the Wealthy & the Wise – Part 1
posted on December 6th, 2011 by Bellmont Research Team
Superannuation is a topic that most people have a definite opinion on – they either love it or they hate it. You have probably already put yourself into one of the camps while you are reading this. My purpose here today is to explain to you why superannuation is a particular favourite of mine, and how it can be used to best advantage. To disregard superannuation because of the regular (and sometimes misleading) bad press it receives may mean that you miss out on benefits which are just not available elsewhere. The examples below show how you may be able to use superannuation to:
• Eliminate income tax in retirement
• Eliminate capital gains tax in retirement
• Offset capital gains tax at any age
• Have your contribution matched by the government
• Have a tax effective income from superannuation whilst you are still working
In my next article, I shall have case studies showing how you can use superannuation to:
• Minimise tax on your income whilst saving for retirement
• Contribute $700,000 (per person) to superannuation within a week or so
• Reduce the cost of personal insurance
• Use superannuation in estate planning to minimise tax when passing assets to beneficiaries
Some clients were referred to me last month who were recently retired. They had previously seen two other financial planners. Both planners correctly advised them to put their inheritance into superannuation and from there to an allocated pension, which gives them both tax free income (they are over age 60) and tax free capital gain. The value of this advice (or of using superannuation): over $3,000 p.a.
They also had a parcel of shares outside superannuation. As they were eligible to make a tax deductible contribution to superannuation, I advised them that they could move their shares into superannuation; claim a tax deduction on $50,000 of contributions to superannuation (in this financial year and next), which was enough to get rid of the capital gains tax on the shares as well. This will get their entire portfolio into a tax free environment within 13 months. The value of this advice: $55,000 in capital gains tax (CGT reduced from $55,000 to zero) plus $6,000 p.a. in reduced (to zero) income tax. This is over and above the $3,000 p.a. in the above paragraph.
When you take into account that their life expectancy is over 20 years, the value of this advice goes into the hundreds of thousands of dollars. And none of this could be achieved without superannuation. Where else can you get both tax free income and tax free capital gain? You can get tax free capital gain from your own home, but once you start earning an income from it, e.g. if you rent out a granny flat, then you must pay tax on the income and also on the capital gain derived from that portion of the building.
So, superannuation is great for retirees. But what about those who are still working? Well, there is good news for you too. How would you like a 100% guaranteed return on your investment? For those who qualify, the government will match your contribution to superannuation up to $1,000. This is only on personal contributions on which no tax deduction has been claimed, and is means tested based on your total income before deductions.
Another benefit available from superannuation is the ability to take an income whilst still working if you are over your preservation age (55 for those born prior to 30th June 1960, and increasing each year to 60 for those born 1st July 1964 and later). This strategy can be used to legally reduce your income tax, and also the earnings tax on your investments inside the superannuation environment.
Bear in mind too, that the negative press about superannuation is generally in regards to investment returns. Superannuation is not an investment style; it is a tax effective method of holding investments. You may have superannuation that is invested in cash, fixed interest, shares, property, or a mix of these. It is certainly not necessary to have superannuation invested in shares. So take advantage of the tax treats, and arrange a mix of investments that suits your present and future needs.
The rules regarding superannuation are extremely complex, so it is important to obtain advice to see what strategies are available to you. The examples mentioned here are specific examples of how I have helped particular clients, and are not applicable in all situations. There are of course, other strategies not mentioned here which may be advantageous to you. Give your financial year a positive start by finding out how you can benefit from the tax treats offered by superannuation.
Janne Ashton – Plan Protect