Whether you’re doing it because you want to travel, study or start a family, taking a career break can really affect your financial future. Thankfully, there are ways to help keep your superannuation in shape.
Different types of breaks from your career can have different impacts on your super savings. In some cases, such as taking annual and long-service leave (unless on termination), you’ll still get paid a regular income and receive superannuation contributionsi, so there won’t be an impact at all.
If you’re a full-time employee, you can usually also take 10 days paid sick/carer’s leave annually and still be eligible for SG payments from your employerii(the number of days may be on a pro-rata basis for part-time employees). In other instances, you may forego superannuation if you take a career break, even if your employer commits to hiring you back at the end of your time away from work.
Tips for managing your super on a career break
When it comes to a career break, many people start planning their exit from the workplace well in advance. As part of this planning, you might want to consider contributing extra into your super as a way to minimise any impact on your retirement savings.
Concessional contributions are one way to do just this. There are two types of concessional contributions:
- Salary sacrifice contributions are pre-tax contributions taken from your salary before your income tax is calculated. This is on top of what your employer might pay you under the Superannuation Guarantee.
- Personal deductible contributions are voluntary contributions you can make using after-tax dollars (such as when you transfer funds from your bank account into your super), then claim a tax deduction for these payments.
Because concessional contributions are generally taxed at 15% which is usually lower than most people’s personal income tax rateiii, this can be a tax effective way to boost your super.
If you’re making contributions to your super, keep in mind that there are limits on the amount you can contribute each year.
The good news is that if you do take a career break, you may be able to make extra concessional contributions above the general cap using ‘carry forward’ arrangements. If you’re eligible, this allows you to access unused concessional cap amounts from previous years and add them to the current year instead – without paying additional taxiv.
If your spouse is taking a career break, you may choose to help their super to grow by making a spouse super contribution. If your partner earns under $40,000, and you meet the other eligibility requirements, you can make after-tax contributions into their super, and may be eligible for a tax offset as well, depending on their income and your contributionsv. Keep in mind that there are limits for how much can be contributed.
In addition to contributing directly into your spouse’s superannuation account, you can opt to transfer some of the super you recently contributed to your own account, into theirsvi. You can typically redirect up to 85% of your concessional super contributions from the previous financial year.
The government’s co-contribution scheme is designed to help boost savings in super funds of low and middle-income earners. If you’re in this category and make personal (after-tax) contributions to your fund, the government may also make an annual contribution of up to $500vii. You don’t need to apply – it will happen automatically after you’ve lodged your tax return, provided you’ve given your tax file number to your super fund.
Other ways to keep on top of your super
In addition to making contributions into your super account, there are other ways you could nurture your nest egg while on a career break. You could look at consolidating your super – that is, bringing all your super together into one account. It could save you time and money on managing multiple fund fees. Although before you consolidate, consider whether you’ll pay any exit or withdrawal fees from your other super funds and check the features and benefits you have in your other super funds to make sure you’re not losing anything that’s important to you (like insurance). We can help you weigh up the pros and cons of consolidating.
Also, make it a priority to monitor how your super account and its investments are working for you. Your needs and attitudes toward investing will likely change at different stages of your life, and understanding how your money is growing accordingly will help you plan for your financial future.
What to keep in mind
- If you exceed the super contribution limits, additional tax and penalties may apply.
- The value of your investment in super can go up and down. Before making extra contributions, make sure you understand and are comfortable with any potential risks.
- The government sets general rules about when you can access your super, which means you typically won’t be able to access your super until you retire.
- If you’re 65 or over and making contributions, you generally need to satisfy work test requirements and be under age 75.
i Australian Taxation Office: Checklist: Salary or wages and ordinary time earnings
ii Australian Government, Fair Work Ombudsman: Paid sick and carer’s leave
iii Australian Taxation Office: Tax on contributions
iv Australian Taxation Office: Carry-forward unused concessional contributions
v Australian Taxation Office: Super-related tax offsets
vi Australian Taxation Office: Contributions splitting
vii Australian Taxation Office: Super co-contribution
©AWM Services Pty Ltd. First published May 2021