Anthony Keane* says ignoring your superannuation can see you being slugged with extra taxes and too many fees.
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Recent rule changes to superannuation have highlighted some of the traps that can seriously sting savers.
In the past 18 months, we’ve seen new super contribution caps, a life insurance overhaul and a crackdown on employers’ compulsory payments.
They might lull savers into a false sense of security, but ignoring super can risk painful penalties — such as getting taxed more than 90 per cent if you contribute too much or missing out on your money altogether.
Here’s how.
Too much life insurance
Many Australians are underinsured but other fund members have more life insurance than they need and miss out on the massive benefit of that forgone money compounding over many years.
Wotherspoon Wealth Director, Simon Wotherspoon said rule changes last year around inactive and low-balance super funds helped stop people with several small super accounts from paying unnecessary premiums.
However, an older fund member paying high life insurance premiums even though their mortgage is paid off and their children have finished school is simply wasting that money.
“You don’t notice it as much coming out of super than if it’s coming out of your own pocket,” Mr Wotherspoon said.
Excess contributions
Australians have a $25,000 cap on the concessional (tax-deductible) contributions they can pump into super each year, and this limit includes compulsory contributions by employers.
There is also a $100,000 annual cap on non-concessional contributions — paid from after-tax money — but both types of contributions now have various bring-forward and catch-up rules.
Confusing?
Yes, but the Australian Taxation Office (ATO) warns that it you contribute over the caps you may have to pay extra tax that “could be as high as 94 per cent in some cases”.
Mr Wotherspoon said that tax rate was only for rare cases and where people had breached both caps.
“Often people don’t understand contribution limits,” he said.
Financial strategist Theo Marinis said rule changes a few years ago enabled people to unwind excess contributions, but they would still be slugged tax at their marginal tax rate.
“If you do exceed it’s not as catastrophic as it used to be but administratively it’s a pain in the butt,” he said.
Bad bosses
Rule changes in January stopped bosses from using your salary sacrifice payments to offset their legal requirement to put 9.5 per cent of your wage into your fund, but some bosses — especially if in financial difficulty themselves — ignore their super obligations.
Protect yourself by checking your super fund transactions every six months, and don’t rely on your pay slip, which can be wrong.
Super won’t go into your fund with every pay and is usually paid quarterly.
“Employers are only required to pay it in within 28 days after the end of the quarter,” Mr Marinis said.
* Anthony Keane is Personal Finance Editor at News Corp Australia. He tweets at @keanemoney.
This article first appeared at www.news.com.au/finance.
