Increasing Super Contributions: What are the Benefits & Risks?
Written by: Chris Strano
Increasing super contributions is an easy process and can provide you with many immediate and long-term benefits.
But how do you know if you should increase your super contributions or not?
Increasing Superannuation Contributions
If you are an employee, your employer should already be making super contributions into your account on your behalf. You may even already be making additional super contributions via salary sacrifice or personal after-tax contributions.
If you are self-employed, you have no-one making contributions for you, but you might be making voluntary contributions to super, or your business may be making contributions into your super account.
Either way, you should be considering the benefits of increasing your super contributions and weighing these benefits up with the risks of doing so.
You also need to be mindful of the maximum amount you are allowed to contribute into super each year.
Related article: How Much Can I Put into Super?
Benefits of Increasing Super Contributions
At the very least, increasing your super contributions will add more of your savings to your retirement nest-egg and provide you with more in retirement. You are unable to access your super until you meet certain retirement conditions, which means this can be a great savings strategy, without the temptation to spend this money sooner.
From a financial perspective, adding more to super through increased super contributions can be very tax-effective. This is because earnings from investments held within super are taxed at a maximum of 15%, which can be lower than if you were to invest in your own name instead. The compounded benefit of these tax savings can supercharge your retirement planning strategy.
The chart below illustrates the growth of $300,000 over 15 years under 3 scenarios, all assuming an investment return of 6% and a tax rate of 15% on all earnings inside super and 34.5% (incl. Medicare) outside super.
Investing inside super and making regular $1,000/mth super contributions (orange line) would provide a balance of $840,000 after 15 years, compared with $730,000 investing outside super and making regular contributions of $1,000 per month (green line) and $630,000 inside super if no regular contributions were made (blue line).
Increasing superannuation contributions can also provide you with immediate tax benefits, because certain contributions, such as salary sacrifice and personal concessional contributions, can reduce your personal income tax in the financial year that you make the contribution.
If you hold insurances within your super account, additional super contributions can also assist in covering the premium costs, which can reduce the impact of premiums eroding your super balance.
Related article: Average super balance by age
Risks of Increasing Super Contributions
The main downside of increasing super contributions is that you are locking this money away until you are eligible to access it.
Read more about when you can access your super here
Another thing to consider is that all contributions made into your super account will usually be invested into whatever investment option/s you have chosen within your super fund. This means your contribution amounts could be exposed to general investment risks, such as capital fluctuations and market volatility. You need to understand these investment risks and ensure you are comfortable with the investment option you have chosen.
How To Increase Super Contributions
If you wish to increase your super contributions by making salary sacrifice contributions, you will need to get in touch with your employer or payroll department. You should tell them how much you would like to salary sacrifice, the frequency, and the super fund you would like the salary sacrifice contributions to be directed to.
Related article: How Much Can You Salary Sacrifice?
If you are self-employed, or would like to make personal concessional or personal non-concessional contributions to super, you should contact your super fund provider and ask the process involved in doing so. Often, you will be able to arrange this as a BPAY payment or direct debit into your account. It would be wise to discuss your intention to make super contributions with your accountant prior to making the contributions.
If you are making a personal concessional contribution, you will need to inform your super fund of your intention to claim a tax deduction for the contribution. You then need to wait for confirmation from your super fund prior to completing your tax return, rolling over your super or withdrawing from your super account balance.
Maximum Super Contribution Limits
The general concessional contribution cap is $25,000 per financial year. The types of contributions that count towards this cap include employer contributions, salary sacrifice contributions and personal concessional contributions. There are some instances where you can contribute more than $25,000 by carrying-forward unused portions of the cap from previous years.
The general non-concessional contribution cap is $100,000 per financial year. Super non-concessional contributions are after-tax contributions made from your personal bank account, where a tax deduction has not been claimed by you in respect of the contribution. You could be eligible to contribute more than $100,000 in a single year using the bring-forward provisions. However, if your balance exceeds $1.6M, you are unable to make any further non-concessional contributions.
Related article: Salary Sacrifice Limits
Super Contribution Age Limits
If you are under age 67, age does not restrict you from making contributions to super.
If you are aged between 67 and 74, you can only make additional super contributions if you meet the superannuation work-test (or work-test exemption). If you do not meet the work test, you can only make the downsizer contribution to super.
If you are aged 75 or more, you can only make downsizer contributions.
Related article: Superannuation over 65
Should I Increase My Super Contributions?
Deciding on whether or not to increase your super contributions involves asking yourself a few questions. The most important of all being, “Is there a chance I will need this money before retirement?”. You should only contribute to super what you are confident you will not need before being able to access it at retirement, because once contributed, you cannot take it out again until then.
From there, you might want to consider whether this money could be better utilised elsewhere. Would it be more beneficial to use this money to reduce debt? Would it be better to invest outside of super to retain access to the funds if required?
And finally, you should consider which type of contribution would be most beneficial to your circumstances: Concessional or Non-Concessional?
Types of Super Contributions
There are two types of contributions you can make to super: concessional contributions and non-concessional contributions.
Concessional contributions are contributions that can not only increase your super balance, but also reduce your personal income tax in the year the contributions are made. These include salary sacrifice contributions (reduces the amount of salary taxed at your marginal tax rate) and personal concessional contributions (provides you with a tax deduction equal to the contribution amount). Concessional contributions will incur contributions tax when received by your super fund.
Non-concessional contributions are after tax contributions made from your bank account. These types of contributions merely increase your super balance and do not reduce your personal income tax. However, non-concessional contributions can provide access to the super co-contribution or spouse contribution tax offset, if eligible. Non-concessional contributions do not incur contributions tax.
Related article: After Tax Contributions to Super
So, to wrap it up, increasing super contributions can provide you with a much higher superannuation balance at retirement, due to the compounded tax savings, provided you are comfortable not accessing it until retirement.