How couples can even up their super balances

NewsSMSF Insights

How couples can even up their super balances

Written by John Maroney, CEO, SMSF Association

First published in The Australian Financial Review on 23 May 2019. Licensed by Copyright Agency. 

Are you like many households where there’s one much higher super balance and the other is lower? We outline why you need to change this and how to do it.

Despite restrictions on making superannuation contributions, there are some limited but specific opportunities for a couple to equalise their personal super accounts to ensure they maximise their available retirement savings and income in retirement. Once a contribution has been credited to an individual’s superannuation account, it typically belongs to that person and can only be accessed by them as a retirement benefit. But there are strategies for couples to redistribute some of their super.

Ensuring that the maximum amount is retained in superannuation when one of the spouses of a couple dies is also an important consideration.

With careful planning and an understanding of the concessions specifically available to couples, it can be possible to direct contributions to your spouse in circumstances where their super account balance is smaller and they would benefit from topping up their account. These strategies are often referred to as spouse equalisation strategies.

When it can work

So in what circumstances would you consider implementing a spouse equalisation strategy, and what do the tax and superannuation rules allow?

Probably the most pressing reason for equalisation of spouses’ super accounts is the transfer balance cap (TBC) regime that was introduced on July 1, 2017. The TBC limits an individual to allocate no more than $1.6 million of their super savings to providing a superannuation pension in their retirement. This is a lifetime cap and includes all superannuation pension arrangements.For a couple to receive the maximum benefit earning tax-free income in retirement, each person could have up to $1.6 million super for a combined total of up to $3.2 million. Unfortunately, the reality is different. Usually one of the spouses has close to or more than $1.6 million in super while their spouse has considerably less. The result is that they collectively can only allocate the $1.6 million of the first spouse and the balance of the other spouse’s super to pensions once they are both in retirement. This usually means considerably less than $3.2 million for a couple.

Ensuring that the maximum amount is retained in superannuation when one of the spouses of a couple dies is also an important consideration.

The closer each spouse has to $1.6 million saved in their respective super accounts – regardless of whether they are in pension phase – the more money that can be retained in the concessionally-taxed super environment for the benefit of the surviving spouse.

The explanation of the superannuation rules in this area is complex. But it is important to understand that when your spouse dies, specific death benefit rules determine how much of your spouse’s super account can remain in super (to be applied for your benefit) and how much must be paid out. Planning for this by equalising spouse super accounts is an important part of preparing for this.

On a completely different track, where there is an age difference between spouses, it is sometimes preferable for the older spouse who will access their superannuation earlier to build up their super account at the expense of the younger spouse in the short term. This enables earlier access to larger amounts of the couple’s super savings. The younger spouse also has more time to address that initial imbalance.

How to do it

Probably the most straightforward way to equalise spouse super accounts involves the spouse with the larger account balance withdrawing a lump sum benefit and recontributing it to their spouse’s account as a spouse contribution or a non-concessional (after-tax) contribution by the receiving spouse. There are a number of rules you must comply with before this strategy can be undertaken.

Most importantly, the spouse withdrawing a lump sum must have satisfied a condition of release that would allow them to be paid a retirement benefit. This is typically that they have retired and are over their preservation age, or left employment on or after their 60th birthday or have simply turned 65.

Another way the spouse with the higher balance can access their super is where they are over their preservation age but have not yet retired. They can start a transition to retirement income stream, which requires them to draw out at least 4 per cent and no more than 10 per cent of their account balance at July 1. These payments can be used to fund the spouse contribution.

The receiving spouse must be either under 65 to receive such a contribution or, if between 65 and 70, satisfy a work test of working 40 hours in 30 consecutive days during the year in which the contribution is made.

The dollar limit of either a spouse contribution or non-concessional contribution is $100,000 a year, with up to three years’ contributions able to be made if the receiving spouse is under 65 in certain circumstances. If the receiving spouse’s total super balance is greater than $1.6 million, these contributions are not possible.

Another opportunity is called spouse contribution splitting.

This involves taking concessional contributions made by the spouse with the larger account balance and splitting the contributions to the receiving spouse with the lower account balance. The tax rules allow one spouse to split up to 85 per cent of concessional contributions made to their superannuation in the previous financial year and request they be transferred, rolled over or allotted to their spouse’s super account.

The receiving spouse must be either under 65 or, if over their preservation age, still gainfully employed. This age-based rule prevents contributions from being split with a spouse who is allowed immediate access to the contributions.

As with many strategies involving superannuation, it is always a good idea to get appropriate and professional advice from qualified advisers. The rules are specific, but the benefits can be substantial for couples if implemented correctly.