The basic idea behind super is you set aside a portion of your pay over your working life, so you can build up a nest egg to see you through your retirement years.
But what if you’re worried you might not have enough super by the time you retire? Yes, you could top up your super now and watch the nest egg grow through the magic of compound returns – but what are the downsides?
If you’re considering putting more money into your super, and want to know more about how the whole system works, here are the basics.
What are the rules about putting more money into my super?
There are two types of super contributions you can make.
The first category is called “concessional contributions”. These are taxed at 15%, which may be lower than the tax you’d otherwise have to pay on that money. So making these super top-ups can not only grow your nest egg, but save you tax.
The amount of concessional contributions you can make is A$27,500 per annum. That figure includes all the super your employer puts in your super account and any extra contributions you make under a salary sacrifice scheme or where you are claiming an income tax deduction.
The second category, known as “non-concessional contributions”, means money you pay into your super without claiming a tax deduction. This could be, for example, money from savings, an inheritance or a lottery win.
There is a limit of $330,000 over three years (or $110,000 per year), for these contributions.
What are the benefits of topping up my super?
Two words: compound returns.
Compound returns are where you earn returns not only on the original investment you put in, but also on any returns on that investment. As the government’s Moneysmart website puts it, “you get interest on your interest”.
Over the years, this means you could earn a lot more than you would if you didn’t top up your super.
How much more? Well, it depends on the investment return and fees of your fund.
But as an example: thanks to compound returns, putting an extra $100 per month into your super from age 30 could mean you retire with an extra $65,000 in your account (here, I’ve assumed investment returns of 7.5%, accumulation inflation of 4% and salary inflation of 4%).
And the longer it is there, the more it will grow – so starting top-ups early might pay off.
Then there’s the tax benefits of super top-ups. If you would normally pay a net tax rate higher than 15% on investments such as shares, your money will grow more quickly inside superannuation than shares.
You may also be eligible for government co-contributions that add to your balance if you make a non-concessional contribution during the year and your income is less than $57,016.Photo by Ketut Subiyanto/Pexels, CC BY
So what’s the downside? Can I access my superannuation before retirement?
The most common is retirement, defined as reaching the age of 65 or leaving work after reaching “preservation age” (which is 60 for anyone born after July, 1964).
These are very narrow, and include serious financial hardship or necessary medical treatment that cannot be funded any other way.
Death or terminal illness also qualify for release.
But what if I need a deposit for a house?
This is a dilemma for non home-owners. After compulsory superannuation guarantee deductions and HECS-HELP, it may be hard to save a deposit.
If you make voluntary contributions, you may be able to withdraw these contributions for a home deposit.
So… should I put more money into my super?
It depends. If you do, make sure you understand you will not be able to access that money until retirement.
If you own your home (or intend to rent until retirement) you may want to put more into superannuation while you can afford it, knowing it is contributing to a secure retirement.
But if home ownership is your goal, you should think carefully about choosing between superannuation and saving for a home deposit.
Note: the contribution caps and rates used in this article are for the year ending June 30, 2023.
- ^ views (treasury.gov.au)
- ^ compound returns (moneysmart.gov.au)
- ^ Tax-free super for the super rich is a bad deal for the rest of us – and Morrison said it first (theconversation.com)
- ^ page (www.ato.gov.au)
- ^ limits (www.ato.gov.au)
- ^ concessional contributions (moneysmart.gov.au)
- ^ Photo by Wes Hicks on Unsplash (unsplash.com)
- ^ CC BY (creativecommons.org)
- ^ Moneysmart (moneysmart.gov.au)
- ^ mean you retire (www.calc.help)
- ^ women (theconversation.com)
- ^ Photo by Ketut Subiyanto/Pexels (www.pexels.com)
- ^ CC BY (creativecommons.org)
- ^ condition of release (www.ato.gov.au)
- ^ special circumstances (www.ato.gov.au)
- ^ Should I pay off the mortgage ASAP or top up my superannuation? 4 questions to ask yourself (theconversation.com)
- ^ First Home Super Savers Scheme (www.ato.gov.au)
- ^ here (www.ato.gov.au)
Authors: Helen Hodgson, Professor, Curtin Law School and Curtin Business School, Curtin University