Tips for managing your super on a career break
Tips for planned and unplanned career break
The real cost of a career break
In June 2021, the average Australian income was $60,000 per year. Assuming you’re not making any extra contributions to superannuation, your employers are contributing the minimum super guarantee (SG) of 10% per annum. Meaning if you’re planning a career break you are forgoing $6,000 per annum in superannuation contributions.
This may not sound like a lot, but the opportunity cost could be significant. This is particularly important if you are in your early 30s with approximately 35 years of work and compounding ahead of you. This is equivalent to about $100,000 by the time you turn 67 years old.
Additionally, this type if career break is seen more profoundly among women because they tend to take more time off paid work. Studies show that while 64% of women in Australia and New Zealand take a break over the course of their careers, only 29% of men do the same.
Research also shows that due to breaks in employment and the ongoing issue of gender pay gaps across many industries, Australian women are, on average, retiring with $80,000 less super than men.
Types of career breaks
Different types of breaks from your career can have different impacts on your superannuation. In some cases, such as taking annual and long-service leave (unless on termination), you’ll still get receive superannuation contributions, 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 employer (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. For example:
- Parental leave: Employers are not required to pay SG for paid parental leave.
- Carer’s leave: After the allocated paid sick leave/carer’s leave, employers are not required to pay SG if you transition to unpaid leave.
- Study leave
- Extended travel
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 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 rate, 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 tax.
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 contributions. 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 theirs. 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 $500. 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.
What to keep in mind
If you exceed the super contribution limits, additional tax and penalties may apply.
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.