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Top tips from Colonial First State’s super expert

We chat to Craig Day, Head of Technical Services at Colonial First State, about why members in their 20s and 30s should start thinking about their super now instead of waiting until later in life.

Q: What are some of the common mistakes that people make with super?

People in their 20s and 30s tend to not do much with their super, and that can be a mistake in itself. It could leave them with a large gap between what they’re capable of contributing in the last 10-15 years before retirement and the level of income they want to retire on. Lots of people say, "I'd love to retire at age 60 on $100,000 a year." But they don't actually focus on their super until they're 45 or older. And to achieve that sort of outcome, the level of extra super contributions that would be required is huge and probably unachievable. That means pushing retirement back or accepting a lower level of income – and therefore a lower quality of life – in retirement. 

Another common mistake is not watching what employers are contributing. If people aren’t getting the correct amount of contributions they’re owed by their employer, it can add up over the years and have a big impact on their retirement savings. The current rate is 9.5% per year, and employers need to pay contributions into their employees’ super accounts at least once per quarter. So people should work out what that figure is and check it’s being paid properly.

Something else to be cautious of in your 20s and 30s is continuing to hold income protection insurance through super. One of the things that super can do is pay insurance policies, and it’s a good idea to hold life and disability insurance through super. But people who have their income protection policy inside super can’t claim a tax deduction for their insurance premiums – whereas that is possible for income protection held outside of super. And income protection policies outside of super generally have more favourable payment periods and can pay a lump sum to cover the cost of things like physiotherapy or getting domestic home help. 

The final mistake I see is not claiming a tax deduction for personal contributions. A lot of people don't realise there are important notification requirements that have to be followed. Super fund trustees must be informed if a member intends to claim a tax deduction, and it must be done within certain timeframes. It’s generally by the time a tax return needs to be lodged, or by the end of the following financial year. We find that people make a contribution, and then by the time they get around to telling the trustee they want to claim the contribution as a tax deduction, it's too late. The notice is invalid and the super fund can’t accept it.

Q: What are some of the most underused super strategies?

The First Home Super Saver Scheme is an underused strategy. I think a lot of younger people don’t realise there's an option available to help them save for their home deposit through super. 

Splitting contributions is another one and it can be beneficial for young families just starting out if there’s a stay-at-home spouse. Rather than the stay-at-home spouse not having any super contributions coming in, up to 85% of the working spouse's concessional contributions can be split between the couple. That could include Superannuation Guarantee contributions, salary sacrificing and personal deductible contributions. It can help keep things even between both spouses.

Lastly, once people get closer to retirement, they should be taking advantage of all the super strategies they can – as soon as they can. Especially if they’ve paid off your mortgage and have a bit more expendable cash flow that they can start directing to super. The earlier people get the snowball rolling, the bigger it is by the time it gets to the bottom of the hill. People shouldn’t leave salary sacrificing or extra contributions until they’re in their 50s. Otherwise people will find they either won’t be able to afford to make the level of contributions they need, or they’ll be restricted by the contribution caps.

While people can put off super for a while to focus on things like paying off your house, they need to keep super in mind. As soon as they can afford to start thinking about retirement, and getting those additional contributions going in, the better off they’ll be in the long run.

*Disclaimer

Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. Colonial First State is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

Disclaimer
Colonial First State Investments Limited ABN 98 002 348 352, AFSL 232468 (CFSIL) is the issuer of the FirstChoice range of super and pension products from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. CFSIL also issues interests in products made available under FirstChoice Investments and FirstChoice Wholesale Investments. This document may include general advice but does not take into account your individual objectives, financial situation or needs. The Target Market Determinations (TMD) for our financial products can be found at www.cfs.com.au/tmd and include a description of who a financial product is appropriate for. You should read the relevant Product Disclosure Statement (PDS) and Financial Services Guide (FSG) carefully, assess whether the information is appropriate for you, and consider talking to a financial adviser before making an investment decision. The PDS and FSG can be obtained from www.cfs.com.au or by calling us on 13 13 36.