Grow Magazine

Bridging the super gap

August 2015

Don’t let a career break hurt your super

If you’re planning a career break make sure your super keeps working hard for your retirement.

Working hours and career paths are more flexible than ever, but so are the ways you can grow your super. 

Have you ever dreamed of taking a year off to travel, go back to university, spend time with family or start your own business?

The thought of taking a career break is enticing, but it can come at a financial price. You not only stand to lose regular income, but the super contributions that go with it.

There are steps you can take before, during and after your career break to make up for the super you’ll be missing.

The first step is to understand how much money is at stake.

Do your sums

If you’re planning a career break, or if you’ve already taken one, think about how much super you’ll miss out on as a result of your time away from work.

Generally, employers currently pay 9.5 per cent of their employees’ annual gross salary as a super guarantee contribution.

On a salary of $80,000, you’ll miss super contributions of $7,600 every year you’re not working.

Let’s compare Jane and Brad. Both earn $80,000 a year and at the age of 30 have a super balance of $50,000.

Jane takes a two-year career break at 30, while Brad works on until they both retire at 60. According to the ANZ Retirement Readiness calculator,1 if Jane makes no additional contributions during her career break she stands to retire with $33,340 less than Brad.

If Jane decides she wants to bridge that super gap and boost her retirement savings, there are several strategies open to her. 

While you’re working

Putting additional super away while you’re working is one of the best ways you can boost your retirement savings.

Using a salary-sacrifice arrangement, your employer can put some of your pay straight into your super before you pay tax on it. Contributions are generally taxed at 15 per cent, unless you are a high income earner in which case you may pay an additional 15 per cent. This is typically a lower rate of tax than you would normally pay on your income.

Let’s look again at Jane and Brad. This time they both have a two-year career break at age 30.

They both earn $80,000 per year and have $50,000 in super at age 32.

 

When she returns to work Jane starts salary sacrificing $50 per week ($2,600 a year) into her super, while Brad does nothing. By age 60, Jane has an extra $97,503 compared to Brad.1

If you do choose to salary sacrifice, remember there are limits to the amount you can contribute each year and potential penalties for breaching those limits. Check with your adviser if you are unsure how much you’re contributing.2    

While you’re taking time out

While you’re not working, or working reduced hours on a lower income, there are other strategies to boost your super. Check if you are eligible for:

  • spouse contributions – where a contribution from your spouse (to your super account) earns them a tax rebate of up to $540
  • contributions splitting – where your partner can transfer their employer and/or personal tax-deductible super contributions into your account, subject to certain conditions
  • government co-contribution – where the government tops up your super by up to $500 depending on your income and voluntary super contributions. You will need to meet certain requirements, such as earning 10 per cent of your income from eligible employments.

Visit the Australian Taxation Office website (ato.gov.au) or speak to your super fund or financial adviser for more information and to see if you are eligible.

  

Plan ahead

If you choose to take a career break or reduce your working hours for a few years, take a moment to think about the impact this will have on your super.

A financial planner can walk you through your options and put in place a comprehensive strategy that recognises your retirement, career and family plans.

The sooner you put a plan in place the easier it will be to boost your retirement savings. That said, it’s never too late to start making up for time you’ve already taken out from the workforce.

 

August 2015