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How to avoid ending up like Cinderella in retirement

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For too long, women have been the wallflowers at the superannuation party. Women, on average, retire with around 40% less super than men despite the fact that we live longer and need more.

According to Women in Super, 40% of older single retired women live in poverty and experience economic insecurity and 44% of women rely on their partner's income as the main way to fund their retirement. Anyone else thinking of Cinderella here?

The reasons for the gender gap have been well documented. In a nutshell, women still generally earn less than men, we're more likely to work part time or take time out of the workforce to take care of family, and more women than men don't receive super at all.

The super system rewards a traditional working life where you work full time continuously and your salary grows over a period of about 40 years. Not only is that no longer representative of the general workforce, it is particularly skewed against women and their need for more flexibility in when and how they work.

how to avoid ending up like cinderella in retirement

But the good news is there are things you can do to boost your super.

Take care of the basics

Standard advice such as starting early to take advantage of compound interest (even a small contribution can help), understanding where and how your money is invested and consolidating accounts to avoid unnecessary fees is particularly important for women.

Watch Hostplus chief executive David Elia explain why high super fees don't always equate to high returns.

Glen McCrea, deputy chief executive of the Association of Superannuation Funds of Australia (ASFA) , says it's also important to check your payslip and super fund to ensure your employer is paying your compulsory contributions - currently 9.5% of your salary.

If your payments are not going in every quarter, or more regularly, you can contact the Australian Taxation Office to report it. But bear in mind that compulsory super is only required if you earn more than $450 a month with that employer. Industry groups have repeatedly called for this limit to be abolished, as it particularly disadvantages women working in several part-time jobs, but, to date, this hasn't changed.

Nerida Cole, managing director, head of advice, at Dixon Advisory, says it can be difficult to boost your super if you can't get your income higher as well. So issues like career advancement and ensuring you are able to work as long as you want to (or need to) are also part of the equation.

"You need to think about your priorities," she says. "It's a generalisation, but often women are more likely to want to use their money to help their family. That can create difficulties later in life.

"A third of women aged 60-64 will be forced to retire because there is no appropriate job or because of health conditions, so women need to think about some of the risks they're facing and plan around that. If you understand the trade-offs a bit more, it can help to make an informed decision."

She says it is also important to think of the big picture and your overall finances. She says having secure housing is a key to retirement and, as a general rule, women should look at paying down their debts first.

"Paying off the mortgage gives you a guaranteed home in retirement and the flexibility before that," she says. "You need a plan to pay down your mortgage, ideally before retirement, but if you need to use your super, that's OK. You just need to have a plan for it."

Make extra contributions

The simplest way to boost your super is to make extra contributions whenever you can afford to. Cole says concessional contributions are the most effective for most people, as these come from your pre-tax income and are taxed at only 15% in your super fund.

If you want to top up your contributions, you can ask your employer to take the extra out of your pay and contribute it to your super fund under a salary sacrifice arrangement.

Or you can make a personal contribution and claim it as a tax deduction. Either way, you can receive up to $25,000 in a year of deductible (or concessional) contributions, including any employer super you already receive.

Cole says high income earners will pay an extra 15% tax on their contributions, but this is still less than their marginal tax rate.

Ways to catch up

Of course, many women don't earn consistent incomes and find it hard to maximise their concessional contributions. Colin Lewis, head of technical services with Fitzpatricks Private Wealth, says a new measure that came in this year makes it a bit easier by allowing "catch-up" contributions when you're earning more if you haven't been able to contribute extra in previous years.

This allows you to carry forward any unused concessional contributions for up to five years. Unfortunately, he says, it only starts from the 2018-19 tax year so if you received no super last year because you took a break from work to care for your children, you could contribute up to $50,000 this year. If you received $10,000 in concessional contributions last year, you could receive up to $40,000 this year.

Once it is fully operational, he says, you will be able to make concessional contributions up to $150,000 in one year if you haven't been receiving super for the past five years, as you can claim the previous five years plus the current year's allowance. Assuming you can afford it, that is.

Cole says the catch-up will be most useful where a woman comes back to a well-paid job after taking time off or working part time.

Lewis says to use the carry-forward arrangement, your super fund account must be worth less than $500,000 on June 30 of the year before you make the extra contributions. So if you're nearing that limit it is better to try to make the extra contributions sooner rather than waiting.

Help for low income earners

If you earn less than $38,000, Cole says an easy way to top up your super is to make a $1000 contribution from your after-tax pay and receive the government co-contribution. This gives you an extra $500 in super from the government. Cole says you can claim a reduced co-contribution if you earn between about $38,000 and $53,000.

Lewis says you need to earn at least 10% of your income from employment to get the co-contribution, so it won't work if you're a stay-at-home mum. However, if you meet this criterion, your partner (or anyone else) can make the contribution on your behalf.

If you're not working or you're earning less than $37,000, Cole says your spouse can claim a $540 tax rebate if he contributes up to $3000 to your super fund. This benefit phases out if you earn more than $40,000.

Build your nest egg quicker by salary sacrificing.

Baby is on the way

Not surprisingly, super is not top of mind when you're working out how parental leave will affect you. AMP researched parents-to-be and found half those taking leave had no idea what would happen to their super. Just over two-thirds didn't feel they should have to think about super at this time, although a similar proportion said being paid super would bring peace of mind.

The federal government's paid parental leave of $740.60 a week before tax for up to 18 weeks provides a basic income for parents taking time off work to have a baby. But it doesn't include super.

Employers are not required to pay super on their paid parental leave, though many do. So it is worth talking to your employer about your entitlements and whether you should be looking to top up your super when you're on leave.

Your super is my super

While you are entitled to claim some of your partner's super if your relationship breaks down, couples are increasingly trying to equalise their super balances while they are together.

You can't just take half of your partner's existing super, but you can split your partner's contributions from the previous year.

"We really like this strategy for people just starting a family where one partner is still working," says Cole. "They can split their super with the primary caregiver."

Lewis says you can use this strategy to transfer up to 85% of last year's contributions to your spouse. He says the $1.6 million limit on the amount that can be transferred to a pension account, providing a tax-free income, is another reason for couples to consider splitting. While most couples are not this fortunate, higher earners may be better splitting super with their spouse and targeting two accounts with up to $1.6 million rather than holding it all in one account.

Downsizing

Lewis says if you're selling your home to downsize, and you're 65 or older, you can also now put up to $300,000 of the proceeds into your super account, even if your name is not on the title deeds. This amount is not included in the normal contribution limits, allowing older people to find more suitable accommodation and give their super a kick-along at the same time.

You must contribute the money within 90 days of settlement.

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Annette Sampson has written extensively on personal finance. She was personal editor of The Sydney Morning Herald, a former editor of the Herald's Money section, and a columnist for The Age. She has written several books.
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