It’s not uncommon for members of a couple to have very different super balances. Depending on a person’s age, income, working days and level of salary sacrifice, there will usually be one member with a much greater balance than the other, often more than double.
Previously there was actually nothing wrong with this and having unequal balances was perfectly fine. That’s because the size of your super fund did not matter in terms of tax and annual contribution rates were capped at the same amount regardless of balance.
However new superannuation changes that took effect from 1 July 2017, and an additional change from 1 July 2018, make equalising your super balance a real priority in most cases.
From 1 July 2017, the maximum amount that someone can have in tax free mode in retirement is $1.6 million. Any excess over this is taxed at 15% on earnings. Therefore, it makes no sense for one member of a couple to have $2 million in retirement and the other member to have $1 million – they should both instead target to have $1.5 million and therefore both have as much as they can in tax free mode.
If you do not think you are one of those people who would ever reach $1.6 million, just keep in mind that this limit could easily change and one day could be $1 million or $500,000.
Furthermore, from 1 July 2018, if your super balance is less than $500,000, you are allowed to defer deductible pre-tax super contributions and catch them up in later years. For example, if the limit is $25,000 and you only contribute $10,000 in one year, you could do an extra $15,000 the following year. Again, to take advantage of this rule, it would be better if both members are under $500,000 as opposed to one at $600,000 and one at $200,000.
One upside however of having unequal super balances is one member may be older and therefore able to access their super sooner. Another upside is a younger member’s balance may be exempt from the Age Pension and therefore could increase your Age Pension.
In terms of practicality equalising balances, this might involve splitting deductible pre-tax super contributions to the member with the lower balance (by completing a form at the end of the financial year), making non-deductible post tax contributions to that member, or using a withdrawal and re-contribution strategy when one is old enough to access their super.
As you can see, there are some real benefits of equalising super balances and there are several ways to achieve this, but it is generally worth seeking advice as to whether such a strategy would be appropriate to you and how best to do this.
Should you have any specific questions about whether a super equalisation strategy would be appropriate for you, please do not hesitate to contact your local William Buck Wealth Advisor.