This article was originally published in The West Australian, Your Money, on 22 May 2023
Preparing for retirement well ahead of when you’re due to finish work is important to ensure you have sufficient time to seek the right advice, and enough working life runway to make the most of the strategies available to you.
Long-serving State Government employees with constitutionally protected GESB superannuation funds such as West State Super and Gold State Super have specialised considerations and significant potential benefits that are not available to everyone else.
Here are five important GESB opportunities to explore five years out from retirement.
Use the untaxed plan cap
Mere mortal Australian workers are broadly capped to annual concessional contributions to super of $27,500, which includes 10.5 per cent in employer contributions, meaning only what is left can be used as tax-effective contributions for retirement.
Not so with members of GESB West State who continue to work for the State Government. They are not limited yearly but instead have a generous lifetime limit, known as the untaxed plan cap, currently at $1.65 million and indexed annually. This presents a meaningful opportunity to boost retirement savings during the final stretch towards retirement.
Transition to retirement strategies from age 60 can allow income to be drawn from retirement benefits tax free to support living costs, which enables higher tax effective salary sacrifice earnings to be made into super.
The key difference is by not having the annual cap, tax effective retirement planning is far more beneficial than for ordinary workers. If living expenses can instead be supported through savings, partner earned income or disposal of assets, some State Government employees will often salary sacrifice significant amounts to super and pay no income tax at all.
This is a “use it or lose it” annual consideration so don’t wait too long to make the most of this opportunity.
Maximise your average rate
Some Gold State members may have opted to contribute below the allowed maximum of 5 per cent for periods across their working life within the State Government.
Members who are under 5 per cent are able to make additional contributions of 6 or 7 per cent, depending on age. If this reduced contribution was made for many years, it can take time to make up the shortfall.
The average contribution rate factors greatly in how much a member receives as their final benefit, and if you’re not there or are unsure, don’t wait until you’re about to retire. Get a grip on how far off you are, and get started soon to make the most of this strategy. Certain occupations such as police officers, magistrates and industrial commissioners can make even higher additional contributions as “special arrangements” depending on age, role and circumstance.
Minimise CGT blow
Many people will look to dispose of investment assets leading up to retirement to consolidate their capital pool, and structure investments for long-term income streams.
This may involve the sale of investment properties or share portfolios that have accrued significant capital gains tax liabilities.
One common strategy is to wait to sell assets after retirement when marginal tax rates are lower. If the capital gain is large enough, there may still be significant tax to pay at higher marginal rates even at that stage.
Another option exists. West State members with sufficient space in their lifetime cap can offset capital gains tax by triggering the sale of an asset and salary sacrificing from the start of the same financial year, while using some of the sale proceeds or other sources to support living costs.
This requires careful forward planning, and if there are multiple investment assets to dispose of, timing the sales and salary sacrifices over multiple financial years, so don’t leave it too late.
Gold State is a defined benefit scheme, and the final benefit is determined by a formula taking into account time worked and salary earned.
The effect of regular salary increases over time will lead to long-term balance increases, but for those nearing retirement age at their peak earnings, another option is worth considering — opting out of the Gold State scheme as a contributing member. This allows a member’s accumulated Gold State balance to earn based on Perth CPI plus either one per cent if under 55 or 2 per cent if over
55. Perth CPI for 2023/24 is 5.76 per cent, so an individual over 55 could earn 7.76 per cent on the total balance, free of market risk, and furthermore will receive super contributions (11 per cent next year) to an eligible super fund.
This becomes an attractive option where a member has a higher balance Gold State fund but doesn’t expect salary growth to outstrip the rate of inflation plus 2 per cent.
Growing outside of GESB
Many of the strategies available to West State members involve using the lifetime untaxed plan cap. However, in addition to contributions, earnings in the fund also contribute to the lifetime cap.
For example, if a member had $1m in their West State account, and it earned a return of 8 per cent, the $80,000 in earnings counts towards the lifetime cap and essentially negates the ability to claim that same $80,000 in future salary-sacrifice tax deductions.
For those pursuing an aggressive salary-sacrifice strategy, with a balance that is fast approaching the lifetime cap, one option is to roll funds out of West State into another super fund, and allow growth to occur in that external fund. The West State fund can still be used to accept the salary sacrifice, while growth occurs elsewhere and you are not wasting future tax deductions. This strategy involves triggering deferred super tax earlier than required and needs to be carefully weighed up when contemplating this approach.
Don’t wait, act now
We started with five strategies to consider five years from retirement, but I had to throw in the sixth — and that is not to wait until five years out.
West State and Gold State have powerful tax-planning powers, and like all financial planning strategies, the sooner you use them the greater the benefit you can derive.
Justin Chong is a GESB expert financial adviser at Empire Financial Group.