Super contributions - the pros, cons and what you need to know!
Super contributions can boost your savings, but how do they compare to other investments and what are the tax implications?
In considering whether to put extra money into super, there is a clear trade-off. You can earn more in the long term and benefit from government incentives in place to encourage super contributions, but you generally won't be able to access the money until you retire.
Let's take a further look at the different ways you can top up your super.
This is also called concessional contributions or salary sacrificing.
If you're still working, you can pay some of your pre-tax salary directly into your super. This means that unlike after-tax contributions, it's never deposited into your account as wages.
For people on higher incomes there are some big tax advantages to these contributions. These types of contributions will reduce your taxable income, which could mean you pay less income tax. Making these contributions will usually save you on tax if you're earning more than $37,000 per year.
"For people on higher incomes there are some big tax advantages to these contributions"
These contributions will be taxed at 15%, which for a lot of people is lower than the usual tax rate you'll pay on your income.
You can make contributions up to a total of $27,500 a year before additional tax may apply. This amount includes both the amount your employer has contributed (i.e. the 10.5% of your salary they pay into your super) and any additional contributions you have made.
For self-employed people, pre-tax contributions are also tax deductible.
How do I make a pre-tax contribution?
Talk to your employer in the first instance to see if they offer this and for details on how to go about it.
After-tax contributions to your super
These may also be called non-concessional contributions or personal contributions.
This is where you choose to top up your super account (i.e. on top of the compulsory contributions made by your employer), either from any savings you have or from the wages you receive.
You can make these contributions on a regular basis (e.g. after you get paid every fortnight) or as a one-off payment.
"You don't have to do anything to get this money; the tax office will pay it straight into your super"
One benefit of making after-tax contributions is that the government will match your contribution up to $500 for people on lower incomes.
People who earn less than $41,112 a year (before tax) will get this co-contribution.
If your total income is between $41,112 and $56,112 in the 2021/22 financial year, your maximum entitlement will reduce progressively as your income rises.
If your income is equal to or greater than the higher income threshold of $56,112 in the 2021/22 financial year, you won’t receive any co-contribution.
You don't have to do anything to get this money; the tax office will pay it straight into your super.
An important point is that you can generally claim these contributions as a tax deduction.
There is a limit on how much you can contribute to your super after-tax. This limit is currently $110,000 per year. You can claim contributions up to $27,500 as tax deductions.
Currently, those under the age of 67 at the start of the financial year can make up to three years of non-concessional super contributions under bring-forward rules.
From 1 July 2022, the cut-off age will increase to 75.
The bring-forward rules allow you to make up to three years of non-concessional contributions in a single year if you’re eligible. This means you could put in up to three times the annual cap of $110,000, meaning you could top up your super by $330,000 within the same financial year.
How much you can make as a non-concessional contribution will depend on your total super balance as at 30 June of the previous financial year. To find out more about bring-forward rules and how your total super balance plays a part, speak to your financial adviser or contact us for a chat.
How do I make an after-tax contribution?
Get in touch with your super fund for further details. You'll need to have your tax file number on record with your fund before you can make one of these contributions.
To claim these contributions as deductions, you'll need to complete the 'Notice of intent to claim or vary a deduction for personal super contributions' form, send it to your super fund and get an acknowledgment.
How other investments are taxed
If you keep any money in a bank account – including a term deposit, a managed fund or invest in the stock market – any interest (or dividends) you earn will be taxed as income.
People earning less than $18,200 per year have a tax rate of zero. For every dollar earned above this level (between $18,201 and $37,000) you pay 19 cents in tax. You'll pay up to 45% tax on some income, depending on how much you earn.
Most people also have to pay a 2% Medicare levy in addition to their income tax rate.
Given super contributions and earnings have a maximum taxation rate of just 15%, for most people there are big savings to be had by putting extra money into super.
"For most people there are big savings to be had by putting extra money into super"
Bank accounts are offering historically low interest rates at the moment and any savings held there will only grow very slowly. It's also possible any money kept in the bank won't keep pace with inflation, meaning your savings will go backwards slightly in real terms.
What if I want to be in control of where my money is invested?
If you choose to put money back into your super, you can choose different strategies to suit your age, goals and level of savings.
If you're interested in investing in shares, many super funds allow you to choose particular industries to invest in or even to select individual shares. Remember, however, that picking shares which outperform the market is very difficult even for experienced investors.
To learn more or to discuss your super contribution and investment strategy, get in touch with us for a chat.