Contributions for your future

With automatic super contributions taken care of through the Super Guarantee (the contributions your employer is required to make into your super fund), many don’t adequately consider the benefits of voluntary contributions and the options available to them. According to the government’s Retirement Income Review, 75% of contributions going into the super system were made by employers in 2018–19.

While voluntary super contributions do typically involve forgoing a portion of money available to you now, you’re in complete control of the amount and frequency of any voluntary contributions you decide to make, some of which can also reduce the amount of tax you pay. What’s more, with life expectancy on the rise and recent research indicating that many of us will spend more than a quarter of our life retired, proactively boosting your super throughout your life can make a world of difference in retirement, thanks in large part to the benefits of compound interest.

According to the moneysmart.gov.au compound interest calculator, a single $2600 investment, growing at 7% annually, becomes $5225 after 10 years, $10,501 after 20 years, $21,103 after 30 years, and then0 doubles again to $42,410 after 40 years, demonstrating the value of early voluntary contributions to your super. What’s more, your voluntary contributions can and should flex according to factors such as your life stage, your age, or where you’re at in your career, and there are additional savings mechanisms that may be available to you such as the First Home Super Saver Scheme (FHSS).

What are my options?

Voluntary super contributions can be made a number of ways and there are essentially two main types:

1. Non-concessional contributions:

   Money added from your take-home pay or after-tax salary, also known as after-tax contributions.

   Common examples include:

   1. Voluntary additional payments made from your take-home pay;
   2. Contributions made on behalf of your spouse (married or defacto). Your spouse may be eligible for a tax offset if you are earning a low income or out of employment;
   3. Government co-contribution which are contributions (of up to $500) that the government makes for low or middle-income earners who make personal (after tax) contributions, as a way to help them boost their retirement savings.

2. Concessional contributions

   Money added to your super before tax, also known as salary sacrificed payments or before-tax contributions.

   Common examples include:

   1. The compulsory contributions that your employer is required to make as part of the Super Guarantee;
   2. Any personal super contributions that you claim as a tax deduction;
   3. Contributions made as part of a salary sacrifice arrangement.

Salary sacrificing involves an arrangement made with your employer to forgo part of your salary or wages and have it paid into your super account. As a concessional or “before-tax” contribution, contributions made through salary sacrificing will be taxed at 15% when it enters your super account, which for most people will be lower than the tax you pay on your regular income.

While voluntarily choosing to lower your take-home pay during your early career years may seem like a crazy concept to some, it’s easier to grow your super overtime by contributing early in your career than to attempt to boost your super immediately before you retire.

If you’re a first home buyer, voluntary contributions made into your super fund count towards the First Home Super Saver Scheme (FHSS) to help you save for your first home, and then apply to have those contributions and associated earnings released to help you purchase a property. If you’re eligible, you may also receive super co-contributions and Low Income Super Tax Offset contributions if you’re a low income earner.

When you reach age 67, rules around super contributions start to change, including a work test which requires you to be in paid work for a minimum of 40 hours over a consecutive 30-day period during the financial year. From 1 July 2022, the work test is only required to be met if you wish to claim a tax deduction on your voluntary non-concessional contributions.

At age 75, you’re no longer able to make voluntary contributions to your fund unless via a ‘downsizing contribution’ of up to $300,000 from the sale or part sale of your home, given you meet certain eligibility criteria.

Things to keep in mind

As non-concessional or after-tax contributions are amounts voluntarily paid into your super fund from your take-home pay that will have already been taxed, you may be able to claim a tax deduction for these if you meet certain eligibility criteria and provide the required notice of intent to your fund. That said, while some super contributions provide certain tax concessions there are limits to the amount of concessional and non-concessional contributions you can make per year, as outlined below:

• Concessional contributions: $27,500 per year (unless eligible to apply the carry-forward rule)
• Non-concessional contributions: $110,00 per year (unless eligible to apply the bring-forward rule)

As you transition through your working life, through multiple careers phases, and into retirement, it’s important to understand how your super needs change according to each stage and how you can make the most of voluntary contributions so your super delivers for you in retirement.

If you’re considering making voluntary contributions but need some guidance, seeking financial advice from a licensed professional is always strongly recommended to ensure any options considered take your personal circumstances and needs into account and are tailored to your specific retirement ambitions.