Splitting your contributions to your spouse
Splitting super contributions to your spouse’s super can provide a range of benefits, more so than simply boosting their retirement savings. This is a terrific strategy to consider if have chosen to take a leave of absence from work to raise children, for a career change, to support your partners career, or even for couples where there exists a significant age gap.
Many couples and partnerships require one party to lessen their workload at one time or another. This imbalance with superannuation balances, can negatively impact the amount each person can take into a tax-free retirement pension.
How does this strategy work?
You are able to split or transfer your own eligible contributions (CC’s) that you make or have received to your spouse’s super account. We will explain the rationale more clearly below.
Firstly, Eligible Concessional Contributions can include:
- Employer contributions; and
- Personal super contributions for which you have claimed a tax deduction
This contribution splitting is a great way to increase a spouse’s super savings in the instances where they:
- are not working;
- have had time out of the workforce; or
- have a lower superannuation balance.
While splitting can help to better cover the cost of insurance premiums, by far and away the greatest benefit provided by this strategy is to both maximise tax-free retirement savings and in turn, maximise a self-funded aged pension.
The maximum that can be split is the lesser of:
- 85% of your CC’s for the year (after taking into account 15% contributions tax); or
- Your CC cap for the financial year.
Ok – a Nuts & Bolts example
Melinda & Bill are both aged 40 and plan to retire in 20 years. They have super balances of $600,000 and $100,000 respectively. Melinda’s employer makes contributions equal to the annual CC cap each year and Bill does not work, nor does he make any contributions to super. At the beginning of year 20, the general Transfer Balance Cap (TBC) is estimated to have increased to $2.1 million through indexation.
Strategy A – No contribution splitting
For the next 20 years, Melinda’s employer continues to make super contributions equal to the annual CC cap. She does not split any CC’s with Bill. Melinda’s super benefit at retirement will be $2,826,633 and Bill’s will be $320,714. If this strategy is implemented, Melinda would be able to commence a retirement phase pension up to the TBC of $2.1 million. This results in her keeping $726,633 in accumulation and drawing $105,000 per annum in tax free pension. Bill can commence a retirement phase pension with his $320,714 yielding him $16,035 pa. Couple this with Melinda’s $105,000 pension, between them they will receive $121,035. Now let’s compare that to a contribution splitting strategy.
Strategy B – With contribution splitting
Melinda splits 85% of her CC’s to Bill each year over the same 20 year period. At retirement, after implementing this strategy, Melinda’s super balance available to commence a retirement phase pension will be $2,059,634 and Bills will be $1,087,712. Both Melinda and Bill can commence a retirement phase pension with their entire balances. Applying 5% drawdown factors, Melinda can draw 5% of her $2,059,634 totalling $102,981 and Bill can draw 5% of his $1,087,712 equating to $54,385. Between them, their retirement age pensions now total $157,366 vs pre contribution splitting of $121,035.
This simple adjustment to Melinda’s super contributions will result in $36,331 increased tax-free income per year for Melinda and Bill in retirement.
Please note- The above example focuses primarily on the Transfer Balance Cap. We have not focused on the benefits that contribution splitting can have on Non Concessional Contributions in the future. Splitting allows us to lessen one parties balance (as we approach the TBC) and in theory allows us to maximise NCC’s for both partners as they approach retirement ages, where the requirement to maximise super contributions is heightened. The above example is to highlight the importance of receiving strategic superannuation advice and the impact it has on retirement outcomes.
|Super fund earnings||6.0% (after fees and expenses)|
|General transfer balance cap||indexed to CPI in multiples of $100,000|