Should I Top-Up My Super?

This week’s show is inspired by another question that we are asked repeatedly each year.

Should I top up my super?

This question is primarily asked to find out if you have enough money saved for retirement to enjoy a comfortable later stage of your life.

The other aspect is tax.

The superannuation scheme is widely known to offer tax savings. This question of whether or not to top up your super is a good idea has an unspoken element. Are you wasting potential tax savings by not using the superannuation?

Please be aware that this podcast contains general information and does not consider your circumstances. The superannuation scheme in Australia is complicated and can involve a lot of money. It is best to seek professional advice before you make any changes.

Super’s Attraction

We’ll start by making sure you understand why Australia’s Superannuation System is attractive for funding your retirement.

Here, the main goal is to generate tax-free income during retirement. You accumulate superannuation during your working years, with the majority of these savings coming from compulsory employer contributions. You retire at some point after 60 and convert your superannuation into a regular monthly income. This income is tax-free.

This is important because it means that there’s been no leakage. Say you are earning $120,000 per year in your current job. You have approximately $88,000 to spend after tax. If you want to be able to spend $88,000 per year on a comfortable lifestyle, you will need to earn $120,000 while you work and pay taxes. To have the $88,000, you need to live comfortably in retirement; however, you only need to withdraw that amount from your retirement funds. Taxes are not leaking out. The amount of wealth you would need to build up to fund a comfortable pension is much less if you fund your retirement through superannuation than if it were outside super.

Superannuation offers many tax advantages, including tax-free income during retirement.

While you’re working, the tax rate on earnings in your super fund is 15% for income and 10% for capital gains. Most people will pay less tax if they hold the same investments in their names than if they had them outside of superannuation.

If you die, your superannuation will be tax-free when it is paid to your spouse. This is different from non-super investments, where capital gains taxes may be due in the event that ownership changes.

The drawback

Superannuation is a great way to accumulate wealth and ensure financial security later in life. There is no free lunch. The “preservation” aspect of superannuation is a drawback.

You can’t access your superannuation until you reach 60 and retire. It is important to put money into super that you know you won’t need until later on in life.

Contribution Caps

This podcast is not going to cover all the details of our complex superannuation scheme. As I said in the intro, I cannot go into detail about it. Contribution caps are one important element to consider when you are considering topping up your super. Contribution caps, and in particular concessional contributions.

Contributions that are eligible for a tax deduction count towards the limit of concessional contributions. This cap is primarily for employer contributions to superannuation, but it also includes contributions made by you via salary sacrifice or personal deductions.

The current cap on concessional contributions is $ 27,500 per year. If you exceed this limit, there may be penalties for contributions.

You will receive an automatic contribution of 10.5% from your employer. When you are considering making additional super contributions, the first thing to do is determine how much of your cap has already been used by your employer contributions. How much room do you have in the cap?

Tax

As I mentioned earlier, our superannuation scheme has several tax advantages. These benefits may not be worth anything to you if you pay no or little tax. It may be the case that you pay more tax on top-up superannuation funds than if you had retained them in your name. You’re now worse off because you have to pay tax on your superannuation contributions.

If your taxable income falls below $45,000, there is little reason to make additional concessional contributions. As you near retirement, there may be strategies that allow you to make lump-sum after-tax contributions. However, salary-sacrificed top-ups will likely see you pay higher taxes or generate minimal savings compared to investing your money on your own.

Alternatives

When I discuss with clients the benefits of top-up contributions to superannuation, one important consideration is how these funds can be used in other ways. This is most often the case with mortgages.

Super contributions are tax-efficient, but you will lose access to your funds for several years. It is often better to use your savings to pay off your mortgage than to make extra superannuation payments. While there is no immediate benefit from this, it guarantees a return on your mortgage rate, which is currently likely to be around 6%.

We’ve all used the calculators to calculate the savings in interest when paying an extra few hundred dollars per month on the mortgage. Once your home loan has been paid off, consider adding to your superannuation if you still have room in the cap.

If you want to retire early, it may be better to invest outside of superannuation on your behalf. This will give you more flexibility to access your savings.

Top-up later?

While considering alternatives, it is also worth considering the possibility of topping up your super later in life with larger lump sums.

I mentioned that the cap on concessional contributions is $27.500 per annum. The non-concessional cap is another cap. The cap is $110,000 per annum for money after taxes. In some cases, you can make three years’ worth of contributions in one year.

Also, there are provisions for those who decide to downsize their house after retirement. You could add $300,000.00 to your super in a lump sum under the downsizer provisions. This is per person. If you are part of a pair, then you could get double.

Compounding is a powerful tool that makes it more attractive to invest money sooner rather than later. In the case of superannuation, however, preservation can be a major counter-weight.

You may find that it is best to pay down your mortgage first, then boost your super when you are closer to retiring. Your employer already contributes 10.5% to your salary so superannuation will be built in any case. You need to think differently if you are self-employed. At the very least, you should try to mimic what you would have put into your super if you were an employee.

How much money do you require?

When deciding whether to top up your superannuation, you may want to consider how much you need.

To begin, you need to determine how much retirement income is required. You can use the MoneySmart calculators to get an estimate of your retirement savings.

With this target number, calculate where you expect your superannuation to be at retirement based on its current balance and employer contributions. If you are already on track for all of the superannuation you need, then sacrificing to make more contributions to super now might be a waste. If you are 95 and not in good health, it would be a shame to have more money than you require. You could have had a lot of fun and made sacrifices to get there.

Contact us if you need help with the numbers. This type of analysis is our core work.