Whilst not conventionally romantic, making super contributions for your spouse can supercharge both of your financial futures.
Just as combining living expenses results in lower costs for each of you, joining forces in retirement planning can bring outsized benefits. All it takes is a bit of smart forward planning.
Plan for Your Ideal Retirement
Spend some time planning some big, hairy audacious goals, including ideal retirement age and lifestyle.
Ensure you have a financial plan organised and written. Superannuation is such an advantageous vehicle, no matter your age you’d be daft not to take advantage of the best benefits. Salary sacrifice into your superannuation to recieve tax discounts and allow your investments to compound tax free for decades.
If you want to access funds before reaching preservation age, you will also need investments outside superannuation. Read more about building your wealth here. Now let’s get back to couple super strategies.
Super Contributions for your Spouse: Spouse Contributions
If your spouse’s assessable income is less than $40,000, you can claim a $540 tax offset by making a spousal contribution of $3000. That equates to an 18% guaranteed return, tax free (beat that!)
This is a no brainer for couples with a high and low (or no) income earner, and periods of time when either of you stop earning money for a period of time (unpaid parental leave, fellowship, travel etc).
Sure, money is always tight during these periods, but the returns are worth extra planning and saving, if possible. Any breaks from paid employment will make a big dent in your superannuation savings over the long term. The spouse contribution will help to lessen this.
You could save it all up to dump in towards the end of the tax year (allow time to process), or pay $115 per fortnight over the whole year.
Your spouse must have a super balance less than $1.6 million and have contributed less than the non-concessional cap that year (currently $100,000).
The $3000 must be after tax. Importantly, you are not eligible for the offset if super splitting (see below) rather than making an after tax spouse contribution (you can do both).
You can make spouse contributions until your spouse is aged 67 (or up to 74 if still working). It does not matter how old you are, as the contributor, but you cannot claim the tax offset if you are your spouse’s employer.
Your spouse’s superannuation company should have details online on how to make the contribution (ours had a dedicated Bpay number for spouse contributions). You then claim the tax offset on your tax return as described here by the ATO.
“Spouse” is defined in this case as someone you live with as a domestic partner, regardless of whether you married or are same/different gender.
Super Contributions for your Spouse: Super Splitting
There is a $1.6 million cap on superannuation funds that you can currently transfer into a tax free retirement income account after age 60.
There is widespread concern that superannuation will be seen as a giant honey pot by the government whenever they run out of cash.
If you retire with $1.6 million (in future dollars) spread between two accounts, you will be less of a target for the government’s next “Tax the rich” scheme than if most of it was in one account.
The cap could become less generous by the time you retire. Even if you aren’t likely to hit $1.6 million, it may be worth keeping balances evenly split in case the cap changes (or isn’t increased in line with inflation).
Super splitting allows you to split your pre-tax super contributions between you and your spouse. It does not allow you to contribute more than the $25,000 concessional cap. Your spouse has to earn and contribute their own super to be eligible for their own $25,000 concessional cap.
Again “spouse” can be your de facto partner, regardless of marital status or gender.
You can split your super contributions at any age, but your spouse needs to be under 67, or up to 75 and still working.
Your super split has to occur after the end of the financial year. You can split up to 85% of your super contributions, up to $21,250 to your spouse annually.
Couples cannot split your balance, other than your contributions for the past financial year, so it’s important to start splitting and keep doing this yearly until your goals are met.
In order to split super contributions with your spouse, download the form from your super website, complete and return it after the end of the financial year you are splitting income from.
Examples of Couple Circumstancs
The Even Stevens
The Stevens are the dream couple, working equal hours, sharing domestic duties, and child care responsibilities (if and when they come along) evenly.
They are, as a couple, the most tax efficient way to earn income – split evenly between the two, so both can maximise the lower tax brackets.
They will also have to pay tax on any investment income outside superannuation. I will assumed the Steven’s earn around $80,000 each for a total household income of $160,000 pre-tax.
Maximise Concessional Contributions Each to Save Tax
If they are good savers, they may be able to maximise $25,000 each concessional super contributions taxed. This would save $8,500 in tax for the couple. leaving them with a post tax income of $93,626 (+$50,000 in super) instead of $126, 026 (+0 in super). This scenario assumes the Stevens’ are both self employed, and have to make the super contributions themselves, claiming the tax concession.
If the Stevens’ are employed, their employers will contribute 9.5% into superannuation. You would therefore only have to contribute a further $17400 each to super via salary sacrifice. The additional contributions would save $6090 in tax between them, leaving post tax income of $103, 354 ($34,800 super contributions) between them instead of $126,026 (+$0 in super).
If there are periods of time when one of both spouses have lower incomes, the strategies listed below for the high and low income earner can be utilised.
Plan if Wanting to Retire Before Preservation Age
The Stevens were born the same year (awww!), meaning they can only access their superannuation on the preservation at the time. Currently this is 60 years old, but it may increase if government want to force the population to accumulate more superannuation before potentially relying on the aged pension.
If one or both of the Stevens’ wish to retire before the preservation age at the time, they will need income sources outside superannuation. This may mean it is impractical to salary sacrifice or tax deduct the maximum concessional contributions to superannuation. Higher income earners may be able to achieve both, however.
Read about wealth building strategies here, the big asset classes are property vs shares (assuming you want 7-10% returns). As the Stevens’ are both on the 32.5% tax bracket, deferring income and favouring growth with capital gains may be a more efficient way to build income over the long term.
High Earner and Low Earner Couple
The Joneses have a high income earning spouse, and a lower earning spouse or stay at home parent. The Joneses were also born the same year, for couples with an age gap, see below for further strategies.
If one spouse is a very low income earner, they will be eligible for the spouse contribution. As above, an 18% guaranteed return on a $3000 super contribution for your spouse is really a no-brainer.
Low Income Super Tax Offset (LISTO)
The LISTO refunds tax paid on pre-tax super contributions ( that has been taxed at 15%) up to $500. Those earning under $37,000 are eligible, and the refund includes super guarantee payments by employers.
This is in addition to the super co-contribution. You do not need to apply for LISTO. As long as your super fund has your TFN, it will be applied automatically and paid directly into your super fund.
If you are working but earning less than $38,564 (but more than $100) you are also eligible for the super co-contribution. By contributing $1000 voluntary contributions to your super, the government will reward you with an extra $500 to your superannuation. I take it back, we could beat the spouse contribution with a 50% return with this.
$500 and $540, utilising the spouse contribution and co-contribution may not be huge amounts of money, but they are minimal effort, no risk (other than general risks of investment inside super).
Check out your super website to find the bpay link for contributions, and let your accountant know at tax time to claim the co-contribution.
As explained above, it makes sense to aim for your super balances to be roughly equal leading up to retirement. Splitting your superannuation with your spouse doesn’t cost anything, but won’t increase the high income earner’s concessional cap.
It is likely the government will continue to limit superannuation help to those with a low or moderate balance.
Putting money in to superannuation is great for asset protection, except in the case of divorce. Super will be included in the asset pool that gets divided in marriage break up, so splitting super doesn’t sacrifice protection.
Your superannuation balances affect eligibility to the aged pension. If you are of similar age, your combined super balance will be taken into consideration.
Part pension eligibility (2020) ceases when you own assets worth $583,000 for singles and $876,500-$1,031,500 for a couple.
High income earners can consider the aged pension a safety net in case of exhaustion of retirement savings.
You may have heard of the Carry-forward concessional contributions rule. The ATO now allows you to “Catch up” over 5 years if you haven’t maxed out the $25,000 concessional cap. You are only eligible to catch up if your super balance is under $500,000. High income earners planning a career break can split super to keep their balance under $500,000.
Couple with an Age Gap
The Smiths have a 10 year age gap between them. Age is just a number after all.
An age gap does create some challenges in relationships, planning a retirement together being one of them. If both spouses wish to retire together, retirement income for the younger spouse may need to last several decades.
Couples with an age gap often fear the older spouse becoming too infirm to enjoy an active retirement with the younger spouse. But an early retirement for the younger spouse can risk running retirement savings dry.
But an age gap also produces some potential advantages. The older spouse has had many more years of compounding interest to grow their retirement savings.
If the couple can live off the younger spouse’s income, super can continue to grow until both are retired. This gives the older spouse’s superannuation more time to compound – the most powerful factor in investment returns. The younger spouse can take advantage of employer pre-retirement work flexibility to provide a semi-retired lifestyle.
The transition to retirement scheme can reduce your tax, allowing the same lifestyle whilst working less
Super Splitting to the Older Spouse Allows Early Access
If the couple plan far enough in advance and save extra, an early retirement for the younger spouse is possible. The older spouse needs enough super balance to support the couple until the younger spouse reaches preservation age. It is best to over split slightly, given the preservation is likely to increase in years to come.
This is a big advantage for the couple with an age gap. They don’t have to invest outside superannuation for an early retirement. They can most likely make their entire retirement income tax free (or minimize tax if rules change).
But splitting superannuation to the older spouse has some disadvantages. If the older spouse may be eligible for the aged pension, extra super balance may reduce aged pension eligibility. If the older spouse becomes requires aged care, their super balance will be used in means testing.
Super inside a spouse’s account, before they reach preservation age is not included in government asset tests for aged pension or aged care.
A lump sum withdrawal can be made to pay off debt (ie the home mortgage). But money taken out to hide in the spouse’s superannuation account to avoid the asset test is likely to be discovered.
Super Splitting to Younger Spouse may Improve Aged Pension Eligibility
This is a strategy more suitable for lower income earners. Part pension eligibility (2020) ceases when your assets are worth $583,000 for singles and $876,500-$1,031,500 for a couple. Any income earned by the younger spouse is also used to reduce the aged pension eligiblity.
If the older spouse maybe eligible for the aged pension at aged 67 (currently), the younger spouse will need to be under preservation age for their super balance to be excluded from asset tests.
Similarly, super belonging to a spouse under the preservation age is protected from asset testing for aged care.
If the older spouse has a larger super balance, the super recontribution strategy may be helpful.
The older spouse with a larger super balance can withdraw a lump sum once they reach preservation age. The lump sum can be recontributed (as a non-concessional contribution) to the younger spouse with a smaller super balance.
This can avoid breaching the $1.6 million accumulation account cap (and eliminate post retirement taxation). Recontribution (either to your spouse or your own super account) will increase the non-taxable super component. This can drastically reduce tax liability on inheritance by your non-dependent heirs (nothing like planning ahead!)
Super Contributions for your Spouse: Where to Next?
Maximising your super gets pretty complicated, especially closer to retirement. The cost of advice is often included in Super membership fees, so advice purely on super may be available for free. Otherwise, you need to find a financial advisor you trust to make sure you are making all the right moves. Hopefully this article has given you plenty of ideas and strategies to explore.
Check out the up to date guide to choosing a super fund.
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Aussie Doc Freedom is not a financial adviser and does not offer any advice. Information on this website is purely a description of my experiences and learning. Please check with your independent financial adviser or accountant before making any changes.