Think about using your super to save on tax
THE world of money is ever-changing, and 2017/18 is the first financial year where you don't have to be self-employed to claim a tax deduction for personal super contributions.
Since July 1, 2017 most people, regardless of their employment set-up, are able to claim personal super contributions on tax - though with some limitations.
Before-tax super contributions are capped at $25,000 annually - a figure that includes your employer's compulsory super contributions. However, if the boss's contributions total say, $15,000 for the financial year, you may still be able to claim a tax break for up to $10,000 of your own contributions.
Part of super's appeal is that before-tax contributions are taxed at 15 per cent. Your personal tax rate could be a lot higher than this. If you earn above $37,000 this year you can expect to pay around 34.5 per cent tax (including Medicare) on each dollar you earn over this amount. Income over $87,000 is hit with 39 per cent tax. Earn more than $180,000, and the tax take rises to 47 per cent.
So, if you earn $70,000, you can take home a dollar and be left with 65.5 cents to invest. Or, you can tuck some cash into super, which would see 85 cents of each dollar go straight to your retirement savings. By adding to your super, you're not just growing a valuable investment, you're also saving on tax. And the more you earn, the more attractive super becomes from this perspective.
The catch is that your super is locked away until later in life. Nonetheless, if your super savings could do with a boost, bear in mind you no longer need to work for yourself to take advantage of a tax break on super contributions. Just be careful not to overstep the $25,000 threshold.
If you're heading towards retirement age, now could be the time to look at how your super is invested. This is known as your 'asset allocation'.
SuperRatings research shows that as fund members age they tend to shift their super away from higher risk 'growth' assets like Australian and international shares, and into lower risk 'defensive' investments like fixed income and cash.
This rebalancing process tends to start from about age 50, so that by age 75 the average super member has around 30 per cent of their super invested in defensive assets compared to just over 22 per cent at age 50.
Gradually reallocating super towards less volatile investments can be a sensible strategy as we get older. Take it slowly though. Longer life expectancies make it important to still have a reasonable chunk of your super invested in growth assets even in retirement. This part of your super should deliver the higher long term returns needed to help your money stay ahead of inflation.
Paul Clitheroe is Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.