For most working people it is possible to pay fifteen per cent tax on some of their earnings rather than their marginal rate of 21 to 47 per cent including Medicare Levy. Now that sounds appealing! There is a catch of course. This favoured rate is achieved by directing income into one's super fund.
There it will be inaccessible until nearing retirement. For some people this may be acceptable and entirely appropriate. We all need to build our retirement savings. The more we have when we retire the better our retirement living standard will be.
Salary taken in cash will be taxed at our marginal rate. Salary sacrificed into super will be charged fifteen per cent entry tax only. On retirement after age sixty it will then provide income and lump sum withdrawals entirely tax free.
While young people may have other priorities those well into their working careers should start sacrificing at least a little salary into super each payday. It might only be fifty dollars per pay initially but should increase as retirement comes nearer.
Fifty dollars out of pre-tax pay will only cost $32.75 out of take-home pay for those in the most common tax bracket. After entry tax $42.50 will remain in the super fund to build retirement benefits.
When workers reach preservation age, currently 58 but rising to 60, they are able to start pre-retirement pensions, even if they haven't retired yet.
Once over age 60 these pensions pay tax-free income. Now that's a rare commodity.
The idea of pre-retirement pensions is to allow older workers to reduce their working hours or move to less responsible, lower paid positions as they ease towards retirement, and many do that.
However tax-free income can be used for all sorts of purposes. For example older working people who still have a mortgage or other debts can use it make extra payments on loans to get rid of them sooner. They could also use it to assist children in difficulty or help meet elderly parents' aged care costs.
The most powerful use of pre-retirement pension income is to combine it with salary sacrifice. The tax-free income from the pension can be used to meet living costs, enabling more salary to be sacrificed into super, and more tax on work income to be saved.
This is what financial advisers call a transition-to-retirement strategy.
The maximum allowable tax-deductible super contributions each year are $25,000 which includes compulsory employer contributions.
Those aged 60-plus should start pre-retirement pensions and use the extra cashflow to make salary sacrifice contributions up to the maximum or as close to it as they can afford.
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