For example, salary-sacrificing $200 a month into your super starting at age 30 could see you retire with an extra $100,000 in the bank. Furthermore, there are also incentives for people to contribute, including tax benefits, Foreman says.
“If you salary-sacrifice and put some of your income into super, you don’t pay your regular income tax on that contribution. You only pay the super contributions tax, which is 15 per cent,” he says.
What sort of contributions can I make?
A contribution that comes straight from your pre-tax income, such as your employer’s contributions or salary-sacrificing, is known as a concessional super contribution. On the flipside, non-concessional contributions are those you make yourself from your after-tax income (i.e. from your personal savings).
Making a non-concessional contribution can be done via a BPAY or EFT payment from your bank account into your super fund. Non-concessional contributions are not taxed by your super fund, but keep in mind you’ve already paid tax on these equal to your marginal tax rate, making them less tax-efficient than concessional contributions.
However, you can convert these to concessional contributions and as such end up only paying 15 per cent tax by completing a “notice of intent” form for that contribution. Fill that out, submit it to your super fund, and you’ll receive an acknowledgement letter back.
You can claim this change when filing your tax return, but you’ll need to keep an eye on not crossing the concessional super contribution cap (more on that later).
What incentives can I get for topping up my super?
An incentive specifically for lower income earners is the government co-contribution. If you’re earning between $43,445 and $58,445 in this financial year, and you make a non-concessional (remember, after tax) contribution to your super, the government will put 50 cents in the dollar, up to a maximum of $500, back into your super fund. For example, if you contribute $500 to your super, you’ll get $250 back.
“The other benefit that’s excellent for young people is the First Home Super Saver Scheme, which essentially allows you to withdraw additional contributions that you’ve made to buy a first home,” Foreman says.
For example, if you salary-sacrifice $10,000 per year for a few years into your super, and you want to buy a first home, then you can withdraw those same contributions plus the investment earnings on that and put the sum towards a first home. You’ll want those contributions to be concessional to enjoy the 15 per cent contributions tax as opposed to being taxed at your marginal tax rate.
“Traditionally, I see most people start salary-sacrificing as they get closer to retirement, but this is an incentive for people to do it when they’re younger. The maximum someone can withdraw [under the scheme] is $15,000 per year and $50,000 across all years.”
If more than one person is buying a home, each person can apply for the First Home Super Saver Scheme, essentially doubling the benefit. If you don’t end up buying a home “the worst thing that happens is that money stays in your super”.
“It is amazing to me how many people don’t really understand salary-sacrificing. From a financial perspective, it’s a bit of a shame that people take it up when they’re older. It’s a good one from a tax benefit perspective and long-term wealth creation,” Foreman says.
The cherry on top to making extra super contributions? An extra layer of security. If you believe your super is low, or it’s lower than you’d like it to be, extra contributions can help you get to a stage where you’re setting yourself up for a “comfortable” retirement, where you can afford more than just essentials and enjoy a holiday (or two) a year.
You can check whether you’re on track to have a comfortable retirement by using the Association of Superannuation Funds of Australia’s (ASFA) “super balance detective” tool.
Are there any limits on extra contributions?
Concessional contributions are currently capped at $27,500, though this will change to $30,000 in the next financial year. You can also use carry-forward contributions, which let you make any unused concessional contributions from the previous five financial years.
“Assume you’ve contributed $10,000 the last financial year, the contribution cap on that financial year was $27,500 so you’ve got about $17,500 in excess contributions that you could ‘bring forward’ and make this financial year,” Foreman says. “That can be excellent if, for example, someone has sold an asset, and they have a capital gain, they can reduce their income tax by putting it into super.”
The general non-concessional contribution cap is much higher, at $120,000 a year. You might be able to use a carry-forward rule for non-concessional contributions, too, and contribute up to $330,000 (technically a three-year cap) if your super balance was less than $1.68 million last financial year.
Are there any downsides to making extra super contributions?
“The main one is that it’s locked away until you’re 60, unless you’re using it for the First Home Super Saver Scheme. Or if you face financial hardship or compassionate grounds; there is a 21.5 per cent tax withdrawal for those if you do qualify, so that’s a real last-resort measure,” Foreman says.