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.
Whatever your stage of life, there are several reasons for planning a career break.
In some instances, leaving the workforce won’t impact your super. But in others, it could hit your financial future hard. The good news is that there are steps you can take now to help you retire comfortably.
What’s the superannuation guarantee (SG)?
SG super contributions are contributions your employer must make into a super fund for you. It’s a compulsory part of your pay package and the rate is set by the Australian Government. Currently this rate is 9.5% of your salary or wages,but is set to increase to 10% on 1 July 20211. It doesn’t matter whether you’re full-time, part-time or a casual employee2, you’re eligible for SG contributions so long as you’re over 18 and earn at least $450 a month before tax
The real cost of a career break
In 2019, the average Australian income was $89,000 per year3. So, at this wage, as of July’s SG rate increase to 10%, taking a one-year career break equates to a loss of $8,900 in employer super payments. And because your super gets invested for you, over the long-term you’ll not only be out of pocket for the missing SG payments but also any gains the money could have made from being invested.
This type of impact 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 – for women, the most common motivation is to raise a family, followed by travel; for men, the top reasons are to travel and study4.
Research also shows5 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 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 contributions6, 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 employer7 (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 leave8.
- 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 workplacewell 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 rate9, 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 tax10.
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 contributions11. 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 theirs12. 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 $50013. 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). A financial adviser 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.
You can check your AMP super balance by logging into My AMP or by calling 131 267.
1 Australian Taxation Office: Super guarantee percentage
2 Australian Taxation Office: Super for employees
3 Australian Bureau of Statistics (August 2020): Average earnings rose in May as low paid jobs lost
4 HRM (May 2019): Career breaks are the new norm – so why are they still stigmatised?
5 Australian Securities and Investment Commission: Women and super
6 Australian Taxation Office: Checklist: Salary or wages and ordinary time earnings
7 Australian Government, Fair Work Ombudsman: Paid sick and carer’s leave
8 Australian Taxation Office: Employer-funded parental leave pay
9 Australian Taxation Office: Tax on contributions
10 Australian Taxation Office: Carry-forward unused concessional contributions
11 Australian Taxation Office: Super-related tax offsets
12 Australian Taxation Office: Contributions splitting
13 Australian Taxation Office: Super co-contribution
According to the research...
The average Australian income in 20193
On average, women retire with this much less super than men5
The percentage of your salary that you will typically receive in superannuation from 1 July 20211
What you need to know
Any advice and information is provided by AWM Services Pty Ltd ABN 15 139 353 496, AFSL No. 366121 (AWM Services) and is general in nature. It hasn’t taken your financial or personal circumstances into account. Taxation issues are complex. You should seek professional advice before deciding to act on any information in this article.
It’s important to consider your particular circumstances and read the relevant product disclosure statement, or terms and conditions, available from AMP at amp.com.au, or by calling 131 267, before deciding what’s right for you. The super coaching session is a super health check and is provided by AWM Services and is general advice only. It does not consider your personal circumstances.
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