Even if you have several years of employment ahead of you, the likelihood that superannuation guarantee contributions (SGC) made by an employer on your behalf will be enough to fund your retirement is slim.
So, what can you do about it? You could do nothing and hope for a windfall or inheritance to provide a retirement income. You could rely on a Centrelink Age Pension to bridge your shortfall. Or you could take matters into your own hands and boost your superannuation savings by making additional contributions.
As well as potentially saving you income tax, contributing extra to your super can help you retire with more money than you expect. While a large lump sum contribution is an obvious way to see your super balance rise instantly, even small amounts over a period of time can have a positive effect. The compound interest your extra contributions can earn means that even average returns could grow your balance at an often-surprising rate.
Adding to your super is either done before or after tax. How you choose to make those extra contributions depends on your overall financial situation. You need to consider your tax position, the level of debt you have, the lifestyle you wish to maintain (and fund) and of course, the caps applied to each different type of contribution. Seeking independent financial advice before making the decision should be considered.
Before-tax contributions include the compulsory SGC (currently 9.5 per cent of your wage), additional voluntary contributions made by your employer, salary sacrifice, and tax-deductible personal contributions for the self-employed. Due to the applicable tax rate of 5 per cent*, which is often lower than your marginal tax rate, these contributions are referred to as concessional.
There are annual limits to the total amount of concessional contributions that can be made, either by yourself or by your employer – $30,000 if you’re under 49 years of age and $35,000 if you’re over 49. From 1 July 2017, the limit will reduce to $25,000 regardless of age.
After-tax contributions include spouse contributions, government co-contributions, any other voluntary contributions you make after tax.
If you earn less than $51,021 per annum, you can take advantage of the Government co-contribution. In order to assist low to middle income earners save for their retirement, the Government will match after-tax contributions that you make to super, at a rate of 50 cents for every $1, up to a maximum of $500.
If your spouse does not work or is a low-income earner (earning under $13,800
Including reportable fringe benefits and employer super contributions), you can make contributions on their behalf and may be able to claim a tax offset depending on your spouse’s income.
After-tax contributions are also subject to a total annual limit of $180,000. If you’re under 65 years of age, you can use the bring-forward rule to make up to three years worth of contributions in one financial year. However, you must not exceed $540,000 in total over the three financial years in consideration.
From 1 July 2017, these limits will be reduced to $100,000 and $300,000 respectively.
The good news is that you don’t have to choose between these methods – you can contribute a mix of before- and after-tax contributions to ensure that you maximise your tax position and increase your super balance in the most effective way.
For more information about contributing to your super, visit AustralianSuper.
*If your income (including before-tax contributions) exceeds $300,000 ($250,000 from 1 July 2017) then a portion or all of your concessional contributions will be taxed at 30 per cent.
This article has been sponsored by AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788, Trustee of AustralianSuper ABN 65 714 394 898. The views expressed are those of YourLifeChoices and not AustralianSuper. For more information about AustralianSuper, please visit australiansuper.com
