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What you may not know about tax and superannuation when saving for retirement

Published 11 October 2021

What you may not know about tax and superannuation when saving for retirement

Superannuation can be viewed as a long-term savings plan and is a great tax saving tool you can use towards your retirement planning. There are a number of key advantages of having your retirement assets in the superannuation environment:

Income in retirement

When you have decided to retire from work you are able to convert your superannuation accumulation account to an account based pension. Once your funds are in pension phase your investment earnings inside your pension account are tax free and, if you are over 60 yrs. of age, your pension payments will also be income tax free to you.

Tax benefits

Earnings from investments held inside a complying superannuation fund are taxed at 15% compared with investment earnings held outside of superannuation that will be taxed at your marginal tax rate. Depending on your income, this could result in a tax saving of up to 32% 1

Salary sacrificing

Commencing a salary sacrifice strategy may be beneficial in building your superannuation assets with the added benefit of saving income tax. Salary sacrifice is an arrangement set up between an employee and employer and involves salary sacrificing part of your gross wages into superannuation. The benefits of this strategy is that not only can you reduce your taxable income (and potentially pay less tax) but the money that is contributed to superannuation (through concessional contributions) only attracts a tax rate of 15% which is lower than most individual’s marginal tax rate. 2

Super Concessional Caps

There are limits (caps) placed upon the amount of money that is able to be contributed into superannuation each year.

Concessional contributions (CC’s) are named so because they are made from pre-tax income and are taxed at a concessional rate. CC’s include employer contributions (including contributions made under salary sacrifice) and personal contributions (claimed as a tax deduction). The amount that is contributed via concessional contributions is taxed at the concessional rate of 15%. 3

As of 1st July 2021, CC’s will be increasing from $25,000 p.a. to $27,500 p.a. At the same time, non-concessional contributions (personal contributions for which you do not claim an income tax deduction) will be increasing from $100,000 p.a. to $110,000 p.a. 4

Additionally, since 1st July 2018, if your total superannuation balance was less than $500,000 on 30th June the previous financial year, and your CC’s are below the annual concessional contributions cap, you may be entitled to accrue the unused amounts and carry them forward for up to five years. This may give you the flexibility to make additional concessional contributions when circumstances allow. This is especially helpful if you have irregular employment or if you have taken time out of the workforce.

Seeking financial advice is recommended when you are looking for a tax-effective way to build your retirement savings. Superannuation and taxation are complex areas of advice and it can be challenging for individuals to keep up to date with changing regulations and laws. Your financial planner will be able to assist you with maximizing your contributions and finding opportunities available to you to boost your superannuation savings.

  1. Source ATO 2021
  2. Source Fiducian 2021
  3. Individuals with income above $250,000 are subject to a Division 293 tax on super contributions. Source ATO 2021
  4. Source ATO 2021