Question: Should I put more (aka make extra contributions) to my Super fund?

Kyle’s answer: 

This is a question I get asked all the time and the answer is ‘it depends’…

Generally, in life, if you gain something you have to give up something. In the case of Super if put money towards your retirement you gain tax benefits and lose access to the money until you’re 60 (for most people).

The Government wants people to save for retirement so that they’re less reliant on the Age Pension and by offering tax benefits they’re dangling a carrot to incentivise us. And these incentives are real.

There are two tax benefits of super:

  • Immediate tax savings by making contributions now and these savings boost your super
  • Ongoing tax savings as the investment earnings on these contributions likely are taxed at a lower rate (15%) than if you invested the funds outside of super

There are two main kinds of contributions to super:

  • Concessional which you get a tax deduction for and benefit from both of the above
  • Non-concessional where you don’t get an immediate tax deduction and only benefit from the ongoing tax savings

As such, we’ll just concentrate on concessional contributions for today as these are most commonly utilised first.

By making concessional contributions, you get an immediate tax benefit if your “marginal tax rate” is above 15% (most people) as these contributions get taxed at 15% rate when money goes into your Super. Below are the tax savings in % terms.

Yearly income Marginal tax rate Contribution tax Tax benefit
< $20,542 0.00% 15.00% -15.00%
$20,542 – $37,000 21.00% 15.00% 6.00%
$37,001 – $90,000 34.50% 15% 19.50%
$90,001 – $180,000 39% 15% 24%
$180,0001 + 47% 15%* 32%*

 *If you’re a high-income earner and income and concessional contributions (and other things) exceed $250,000, some or all of your concessional contributions will be taxed at 30% rather than 15% however this is beyond the scope of this post. It’s important to note however that this doesn’t eliminate the benefit and incentive, rather reduces it.

For example, let’s say you’re earning $90,000 and can save to contribute $5,000 into Super each year. This will reduce your take-home pay by $3,275 ($5,000 x (1 – 34.5%)) but your super balance has increased by $4,250 ($5,000 x (1 – 15%)), a tax saving of $975. A simpler way to work out this is to use the relevant “Tax benefit” % from the above table e.g. $5,000 x 19.5% = $975.

The Government wanted to confuse us more and put a cap of $25,000 on these contributions and this includes the contributions that your employer already pays (generally 9.5%) so you don’t want to go over this cap.

In addition, these contributions and tax savings are invested in a tax friendly environment which enhances the effects of compound interest due to the higher after-tax return compared to the same investment outside of super.

So, it’s tax and financially beneficial for me, what’s the catch?

You likely can’t get access to these contributions until your “preservation age” which is 60 for most so is a matter of prioritising your goals. For example:

  • You might be saving up for a home
  • You might think that paying off your mortgage or debts is more financially and/or emotionally beneficial to you
  • You might want to retire early and need access to the funds before you’re 60
  • You might want to invest in assets that you can’t in super
  • There might be uncertainty and you’d like to keep your options open until there’s more certainty

Sure, contributing additionally to Super will likely maximise your wealth at 60 but you don’t want to limit your options before then so is often a balancing act.

So I’ve decided I want to contribute a certain amount, how do I do it?

Firstly, know what you’re currently contributing and make sure you don’t go over the yearly cap and decide on the amount. You can do this by looking at your payslips, chatting to your employer or chatting to your Super fund.

Once you know what amount (under the cap) you know you want to contribute, chat to your payroll and they will outline the process. This is called “salary sacrifice”.

Alternatively, you can chat to your super fund and they can tell you how to contribute from your bank account and you can then claim a tax deduction.

Kyle Frost is an independent financial adviser at Millennial Independent Advice (AFSL: 511 786), where he helps people in their 20’s and 30’s make smart decisions with their money. Click here to subscribe to his updates.