I have always felt that super contribution splitting does something quite important in many relationships: it puts a value on unpaid work!
Of course this is not usually why people come to see me as a financial planner, but sooner or later, it is usually realised. Allow me to explain:
When young couples initially come to see me, it is normally motivated by a purchase of their first home or the intention to start a family. Quite often the incomes and the super balances are fairly similar and at this stage of their lives.
When older clients initially come seeking advice, it is motivated by a desire to prepare for retirement. By this stage of life, it is extremely common for the super balance of the male to be far larger than the female client.
The reasons for this are obvious. Generally women take time away from work to start their family and even once their children start school, commonly choose to work part time in order to balance their unpaid work demands with their paid work hours.
In this situation, income from paid work is compromised for sometimes 10-15 years and super balance is impacted exponentially. In annual meetings, there is often despair at how their super balance is falling behind. In worst cases there might even be some resentment.
One way that the family unit can at least try to remedy some of this imbalance is with the strategy known as Contribution Splitting.
Contribution splitting enables a super fund member to split up to 85% of their concessional contributions (CCs) in a financial year with their spouse.
There are a number of potential advantages of contribution splitting including:
- Increasing the combined amount transferred into tax-free retirement pensions
- the amount of taxable superannuation earnings that may be subject to the proposed Division 296 tax
- fund insurance premiums for a spouse who, for example, is not earning an income or is on extended leave
Contribution splitting does something quite important for the member of the couple who is undertaking the majority of the unpaid work. It places value on that unpaid work. And it is the couple themselves who are choosing to place a value.
Meet Chloe and Chris. The table above tracks their superannuation balances at key life stages across three scenarios and shows the use of adding an extra 5% to Chloe’s super in the 11 years prior to having children, and then the impact of super splitting with a spouse for five years when Chloe takes time out of the workforce and eventually returns part-time. Key Assumptions: 2% annual pay rise. Chloe starting salary $70,000 and Chris starting salary $80,000.
This strategy is going to become even more important for women. Since 2022 the government has demanded that product providers deliver “comprehensive income products for retirement”. We will see the products from many providers ‘hitting the shelves’ over the next 12-24 months.
The products are primarily designed to allow some form of guaranteed income in your retirement years and for the individual, this will mean rolling a portion of your Super balance (say 20%) into such a product.
All of this means that having a healthy Super balance when you hit your 60’s has never been more important. Women (due to their Super balances) will generally be at a disadvantage to optimise these products.
The Women’s Index shows us how long many of these imbalances will take to reach parity. Contributing Splitting is a lever that a couple can use to at least take some control of this imbalance.
