As end of financial year approaches, now is the ideal time to maximise the benefits of extra superannuation contributions.
Making concessional (before-tax) and non-concessional (after-tax) contributions to your super can be a great way to compound both the interest on your super, as well as on the tax saved.
Extra super contributions are usually taxed at 15%, which is significantly lower than the typical personal income rates of between 18% and 47.5%. This means as well as earning compound interest on your additional contribution, the interest on the tax saved is compounded too.
There are annual caps on how much you can put into your super account, so it’s important to stay on top of both your concessional and non-concessional contributions across all your super accounts.
Super is a long-term investment and should be reviewed regularly. While it’s not always possible – or appropriate – to make extra super contributions, there are some stages of your life where bumping up your super can be a seriously smart move.
Here, we take a look at five life events where making additional contributions can make a big difference to your long-term financial health:
1. Parental leave
Taking time out of the workforce to raise a family means women retire with an average of 25% less super than men.
In good news, superannuation will be added to government-funded paid parental leave from mid next-year; by 2026 those on parental leave will receive super of 12% based on the national minimum wage (currently $882.75 per week).
However, parents who take a longer period of leave often miss out on several months of super payments from their employer. Spouse Contributions allow those in a marriage or de facto relationship to make non-concessional contributions to their partner’s super. This boosts the super pot of the spouse, and gives the contributing partner an 18% tax offset on contributions up to $3000 if their partner is earning less than $40,000 a year.
Equalising your super balances not only avoids any conflict over spending amounts, it can also help super funds remain tax-free up to a cap of $1.9 million.
2. Redundancy
It might seem counter-intuitive to invest in your super if you’re not working for a period of time. However, receiving a lump sum payment can be a good opportunity to top up your super account – particularly as most employers don’t pay super on any redundancy payments. If you’re confident you’ll be able to start working again reasonably soon, using your redundancy payout to make an extra contribution can be a good way to give your super an unexpected boost. Plus, if you earn less than $58,445 in a financial year and make an after-tax contribution to your super, you’re eligible for a co-contribution of up to $500 from the government.
Redundancy is also a good time to review and consolidate your super so you’re not paying unnecessary fees. Remember, if you don’t pay into your super account for a certain amount of time, you may lose any insurances within the fund. Talk to your financial advisor about the best way to navigate this.
3. Kids finishing private school
If you’ve put children through fee-paying education, you might have some surplus cash once they’ve hung up their uniforms for good. For many parents, this comes in your late forties or fifties, often meaning you might have paid off a chunk of your mortgage and have some other investments. Topping up your super with some of your freed-up cash can be a sensible option at this stage of your life.
4. Divorce
Divorce can be financially tough. Not only does it limit your future spending capacity, but it can mean your assets take a big hit. Super is usually your biggest asset after property, and can often end up being split during divorce, dramatically reducing your investment. Making extra contributions to your super fund if you’re suddenly single can be an essential part of safeguarding your retirement.
5. Inheritance
Receiving inheritance can be an emotional time, so think carefully about what to do with any money you receive. Depending on your financial goals, your level of debt, and your age, investing some windfall money into super can be a good way to make the most of catch-up concessional contributions. Remember, you can contribute extra into your super until you’re 75, even if you’re not working.
Super Tip!
For extra contributions to count in this financial year, they must be received by your super fund by 30 June. This means money should be sent by 24 June to ensure it has time to clear.
At CFV Services we believe in helping you live a rewarding and fulfilling life; part of that is planning for the future and investing your money wisely. Come and have a complimentary Goal Discovery session about your financial future.