With new research showing women face a $40,000 gap in their super balance just related to the effects of menopause, it’s more important than ever for financial advisers to talk to their female clients about what they can do early on in life to boost their super.
Government incentives can make all the difference and, during their working lives, there are three main avenues in the super rules for women to do something about the gender super gap – the Association of Superannuation Funds of Australia says the median super balance for women is about 25 per cent lower than men’s. The earlier women can use these strategies the better, to take advantage of compounding.
First, the super co-contribution rules can help women on lower incomes who are still building up their careers to add to their super balance, as long as they meet the eligibility criteria.
People who earn less than $45,400 a year and contribute $20 or more a week to a complying super fund, or $1000 a year, could be eligible for a government co-contribution of up to $500, as long as they also meet other criteria. Under today’s rules, this phases out entirely for people earning $60,400 or more.
“This is still a potential 50 per cent return in a very short timeframe,” Wealth Planning Partners director and adviser Amanda Cassar tells Professional Planner.
The spouse super contribution is the second government incentive that can help boost women’s super balances in retirement. This is designed to support the retirement outcomes of people who take extended leave to raise a family or care for elderly or unwell relatives.
Under this scheme, the partner of someone who earns less than $37,000 a year can contribute up to $3000 into the low-income partner’s super as a non-concessional contribution and receive a personal tax offset of up to $540, as long as qualifying criteria are met.
The super contribution splitting benefit is the third incentive and it means both the personal and super guarantee can be split between both spouses’ super funds.
There are ways to add an extra $40,000 to a client’s super using these rules in just one year, according to Cassar’s numbers.
Let’s say Nicole, 25, has $20,000 in super, earns $100,000 and takes a year’s maternity leave. Sharon contributes $1000 to her super fund to qualify for the $500 government super co-contribution. Her partner Barry pays $3000 into Nicole’s super fund with the spouse contribution.
They can super split $30,000 (minus 15 per cent tax of $4500), so that’s $25,500 at an 85 per cent split in Nicole’s favour to get to $21,675 to add to her super fund. So, in total, that’s $1500 plus $3000 plus $21,675 equals $26,175.
But wait, there’s more. Nicole would be able to contribute an additional $4255 to her super fund if she worked for part of the year and earned 11.5 per cent super guarantee charge (SGC) on $37,000. This brings Nicole’s total contribution to $30,430. Add a $10,000 personal contribution and she could contribute an additional $40,430 to her super fund in one year.
Taking advantage of government concessions over years can make a real difference to the super balance of the woman taking time off to raise the family, says Pekada principal Pete Pennicott. Pennicott put together this hypothetical example.
Let’s say Beryl, 30, earns $80,000 a year and has $50,000 in her super and her only contributions are the SGC. If she retires at 65 without a career break and chooses the high-growth investment option, Beryl’s projected super balance would be $648,357 in today’s dollars.
But, if Beryl took a five-year career break at age 35 and did not contribute to her super fund in this time, at age 65 her balance would be $536,230 in today’s dollars. This assumes she returns to full-time employment on the same income as she was earning before her pre-career break.
Assuming Beryl’s spouse Kevin is on the same income and splits half their SGC payments via super splitting to Beryl’s super fund for the five years of her career break, her super fund balance would be $592,293 in today’s dollars.
“Without impacting the household cash flow or combined superannuation balance, taking advantage of the super splitting rules over an extended period can make a material difference to the super balance of the partner taking a career break, reducing the super gap at retirement,” Pennicott says.
When seeing a couple, it’s important for advisers to encourage both partners to be equally engaged in the financial planning process and be realistic.
“A real financial plan works best if it reflects the values and priorities of both members of a couple,” Pennicott says.
“If only one person is involved, it may all seem fine until something goes wrong, such as death, illness or a relationship breakdown. Suddenly, the person who wasn’t involved is scrambling to understand the plan, structures and decisions they never made. Everyone goes into a relationship hoping you’ll grow old together. But at the same time, you need to be prepared.”
