Why making additional contributions to your super may benefit you

Saving and investing for your future is one of the wisest and most important things you can do, whether you are just starting out in your career, cementing financial foundations, or approaching retirement.

To live the lifestyle you want in retirement, you may need to make additional contributions to your super, over and above the mandatory employer-paid 9.5% superannuation guarantee. Despite the fact that many Australians need to make additional contributions to secure sufficient retirement savings, only 1 in 8 employed super fund members make any additional contributions to their super.

 

Why make additional contributions?

There are both long-term and short-term benefits to making additional contributions to your super.

One of the long-term benefits is compound interest, which Albert Einstein reputedly called the “eighth wonder of the world”. Compound interest refers to the fact that savings grow exponentially over time as interest earns interest on itself!

A simple compound interest calculation (using the Money Smart Compound Interest Calculator) shows that contributing an extra $500 a year (or $9.60 a week) would see an almost $100,000 boost to your retirement savings. When it comes to super, small contributions made early and regularly can have a huge impact!

Some of the short-term benefits include the possibility of reducing your income tax, or accessing government co-contributions if you are eligible.

It’s important to note that additional contributions don’t benefit everyone, and not everyone is eligible to take advantage of some of the benefits of making additional contributions. Before we consider eligibility, let’s first look at the different types of additional contributions that you can make.

 

Concessional contributions

Concessional contributions are before-tax contributions, which are taxed at a maximum flat rate of 15%. They include employer contributions, salary sacrifice contributions and personal deductible contributions. When making concessional contributions, you must ensure you do not exceed your annual concessional contribution limit which is $25,000 for the 2020/21 financial year.  If you think that making additional contributions might push you over this cap, please call our Member Care Team on 1300 360 907, or email members@christiansuper.com.au to check before you make any additional contributions.

There are a couple of different ways you can make additional concessional contributions: salary sacrificing and personal deductible contributions.

 

Salary sacrificing

Salary sacrificing into your super is done through your employer, whereby they pay a  percentage of your pre-tax salary as an additional concessional contribution to your super account. This arrangement enables you to pay 15% contributions tax on the amount you contribute rather than your marginal tax rate (21%, 34.5%, 39% or 47% including 2% Medicare Levy) depending on your taxable income.

For example, Ben is 60 years old, earns $70,000 taxable income and salary sacrifices $10,000. He will save nearly $2,000 in tax (i.e. 32.5% + 2% Medicare Levy – 15%) x $10,000 = $1,950.

Note that there is no benefit in salary sacrificing additional super contributions if you do not pay tax (generally if your taxable income is less than $21,885).

 

Personal deductible contributions

Alternatively, you may choose to make personal deductible contributions (also known as voluntary after-tax contributions), which may help you achieve the same result as salary sacrificing if you then claim a tax deduction. This method involves using funds in your bank account rather than asking your employer to make additional contributions, and submitting a form to claim the tax deduction.

To claim a tax deduction on your voluntary after-tax contributions, you will need to take the following steps.

  1. Make an after-tax contribution to your super account before 30 June

Remember that there is a $25,000 concessional contribution cap for the 2020/21 financial year. If the combined total of employer contributions, salary sacrifice contributions and personally deductible contributions that are received by your super fund exceeds this cap, you may have to pay additional tax.

You can also use the catch up contribution rule where you contribute more than $25,000 if your superannuation balance is less than $500,000 and you have not used your $25,000 limit in past financial years.

  1. Lodge a notice of Intent Form with Christian Super

You’ll need to lodge a Notice of Intent Form with us. This is a form from the Australian Taxation Office (ATO) which allows you to claim or vary a tax deduction for personal super contributions. Complete the form, attach the necessary payment and send to Locked Bag 5073, Parramatta NSW 2124. If you’d like to make your contribution via BPAY, your BPAY details can be found by logging into your online MemberAccess account. We will acknowledge the form and payment in writing.

  1. Have your paperwork in order when you do your tax return

After 30 June, you can lodge your tax return using the written acknowledgement you have received from Christian Super which confirms your intention to claim and the contribution amount you can claim. You have until 31 October to lodge your tax return for the previous financial year, though you may have more time if you use a registered tax agent.

 

Non concessional contributions

In addition to your annual $25,000 concessional contribution limit you also have a $100,000 non concessional contribution limit. Non concessional contributions are also known as after-tax contributions, so they are taxed at your marginal tax rate (vs concessional contributions which incur
only 15% tax). The following benefits may be available to you if you make non concessional contributions:

  1. $3,000 spouse contribution

If your spouse earns less than $37,000 p.a. you can transfer $3,000 into their super account and receive a tax rebate up to $540. Read more about spouse contributions here.

  1. $500 government co-contribution

If you have an income of less than $54,837 in the 2020/21 financial year, your super account could receive up to $500 in the form of a co-contribution from the government. Read more about the government co-contribution here.

  1. Downsizer contributions

If you have sold your home, that you have owned for 10 years, and you are over 65 years of age you may be able to contribute up to $300,000 to your super per person (i.e. $600,000 for a couple) within 90 days of the sale. This can provide access to the tax free pension phase of superannuation. Read more about downsizer contributions here.

 

Are you eligible to make contributions?

Not everyone is eligible to make contributions so check the table below to see if you are. Remember to ensure you don’t exceed your annual contribution limits of $25,000 for concessional contributions and $100,000 for non concessional), as well as the your total superannuation balance limit of $1.6 million.

Age Employer Super Guarantee Employer Voluntary Member Spouse
Under 67 At any time At any time At any time At any time
67 to 74 At any time Work test required Work test required Work test required
75 and over At any time Not permitted1 Not permitted2 Not permitted

 

Note: to pass the work test you must be gainfully employed at least 40 hours in any 30 consecutive day period during the financial year in which the contribution is made.

1 The age-based contribution restrictions do not apply to downsizer contributions.
2 A contribution may be accepted up to 28 days after the month in which the member turns 75.

 

Worried about cash flow?

If you don’t have the capacity to forego income, or spare funds to put into super, you could access funds using a transition to retirement strategy. To do this, you need to have reached your preservation age, which is currently 58 years. Contact our Member Care Team or check out our Pension Guide if you would like come information about this strategy.

 

Questions?

Remember, our Member Care Team are always happy to help and are available 9am and 6pm Monday to Friday. You can call the team on 1300 360 907 or email us at members@christiansuper.com.au.

 

Disclaimer: The content of this article includes advice that is general in nature and does not consider your personal situation. Christian Super encourages all people considering their options in retirement planning to seek out qualified professionals who can provide specific personal advice.