Should You Add More to Super? The Simple, Smart Moves you Need to Know

Superannuation is one of the most powerful tools for Australians when it comes to building wealth for retirement. For many, contributing more to super can lead to a larger nest egg, tax savings, and peace of mind. But is it always the right move? In this article, we’ll cover the pros and cons, walk through a tax-saving example, explain ideal contribution rates, and share practical tips on how to increase contributions painlessly. Let’s explore if you should add more to super.

Pros and Cons of Contributing More to Super

Understanding the benefits and limitations of the superannuation system is crucial for making an informed decision on whether you should add more to super.

Pros:

1. Tax Savings on Contributions and Earnings:
   Contributing extra to super can provide tax benefits that enhance your savings. Salary sacrifice and personal concessional contributions (taxed at 15%) are generally lower than the standard marginal tax rate (MTR), making super contributions a tax-efficient way to save for retirement. Additionally, earnings within super are taxed at only 15% (or 10% on capital gains if assets are held for over a year), rather than your usual income tax rate.
2. Tax-Free in Retirement:
   Once you reach the age of 60, withdrawals from your super are generally tax-free. And with the current $1.9 million transfer balance cap, you can enjoy a tax-free retirement income stream within that limit, allowing for a substantial, tax-free nest egg.
3. Long-Term Investment Strategy:
   Super is designed to be a long-term investment, growing over decades. With a diverse portfolio, your super benefits from compounding, potentially delivering more robust growth than short-term investments.

Cons:

1. Restricted Access:
   Super contributions are locked away until you reach your preservation age (usually between 55 and 60), meaning you can’t access this money to meet immediate needs or unexpected expenses. This is a key consideration, especially if you anticipate needing funds for significant life goals before retirement.
2. Annual Contribution Limits:
   Concessional (before-tax) contributions are capped at $27,500 per year, and non-concessional (after-tax) contributions are capped at $110,000 per year, making it important to avoid over-contributing to prevent additional tax penalties.
3. Total Lifetime Limit:
   The total amount you can hold in your super tax-free once retired is capped at $1.9 million, known as the transfer balance cap. While this is a generous amount, it may limit those planning for very high retirement balances.

Example: How to Add More to Super & Save on Tax

Let’s look at a real-life example to illustrate the tax benefits of contributing more to super.

Consider someone earning at a marginal tax rate (MTR) of 32.5%. If they salary-sacrifice an additional $100 a week into their super, they’ll contribute an extra $5,200 annually. Here’s how the tax savings add up:

1. Tax Savings on Income:
   Normally, the $5,200 would be taxed at 32.5%, equating to $1,690 in taxes. By salary-sacrificing into super, however, that contribution is instead taxed at the concessional rate of 15%.
2. Effective Tax Benefit:
   At 15%, the contribution incurs $780 in tax, resulting in a tax saving of around $910 for the year. Not only is this saving, but it also means more of your earnings go directly toward building your retirement savings.

Current Super Contribution Rate and the Ideal Benchmark

The current mandatory super contribution rate is set at 11.5% and will increase to 12% by July 2025. However, many financial planners suggest aiming for a 15% contribution rate to comfortably meet retirement goals.

Adding an extra 2-3% from your income through voluntary contributions could help reach this benchmark. For many, achieving a 15% rate is manageable through small adjustments, like increasing contributions with pay raises or making a commitment to salary sacrifice.

How to Contribute Extra to Your Super

There are two primary ways to increase your super contributions:

1. Salary Sacrifice:
   This is one of the simplest and most effective ways to contribute extra to super. Arrange with your employer to deduct a portion of your pre-tax income directly into your super, reducing your taxable income and allowing the contributions to be taxed at the concessional 15% rate.
2. Personal Contributions:
   You can also make after-tax contributions to your super, which are known as non-concessional contributions. This method allows you to contribute any additional amount directly from your post-tax income, up to the cap of $110,000 per year.

Painless Ways to Add More to Super

Boosting your super doesn’t need to impact your day-to-day cash flow significantly. Here’s a simple strategy:

• Allocate Future Pay Rises to Super:
  Here’s a way we help our members add more to super: Whenever you receive a pay rise, consider putting 0.5% to 1% of your salary into super. This incremental increase means you’re investing more for retirement without noticing a significant reduction in your take-home pay. Over time, this can help you reach the 15% target contribution rate, while still enjoying some of the benefits of your raise.

Important Considerations Before Contributing More to Super

While investing in super offers advantages, it’s essential to consider how it aligns with your overall financial situation and goals.

1. Other Financial Goals:
   If you’re paying off a home loan, managing other debts, or have short-term financial goals (like buying a car or funding education), consider prioritising these before locking funds away in super. It’s crucial to have a balanced approach.
2. Emergency Savings:
   Building an emergency fund should be a priority before contributing extra to super. Having liquid savings gives you financial flexibility and security in case of unexpected expenses.
3. Need for Access Before 60:
   Super contributions are generally preserved until you reach retirement age. If you may need access to funds sooner, look at other savings options in addition to super contributions.

Conclusion: Should You Add More to Super?

Contributing extra to super can be a valuable strategy for building a robust retirement fund and reducing taxes. However, the decision of when and how much to contribute depends on your personal circumstances. For some, especially those with high current expenses or other financial priorities, contributing extra may not be immediately feasible. For others, reaching the 15% contribution benchmark could be the foundation for a secure retirement.

Ultimately, working with a financial adviser can provide personalised guidance to help you find the right balance between super contributions and other financial goals.

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