Don’t Assume Your Default Superannuation Is Enough

Australia’s Super Guarantee Contribution rate is currently equal to 9.5% of your ordinary time earnings, on income up to $54,030 per quarter. However, the amount you’ll actually receive can vary significantly depending on the fund you belong to and the type of fees they charge.

In any event, it’s wrong to assume your super nest egg will set you up for retirement. Here are a few things to consider.

When it comes to calculating how much we need to save for retirement, a lot of us blindly accept whatever number is presented to us as the default. Instead of accepting our minimum super as the solution, we should instead ask ourselves how much we can afford to contribute ourselves. Depending on your income, you might be able to get the government to pitch in too. As the Australian Securities and Investments Commission’s MoneySmart website explains:

If you want to live comfortably when you retire, adding to your employer’s super contributions can help build your nest egg. If you’re on a lower income, you may be eligible for bonus contributions from the government.

Make pre-tax super contributions

You can ask your employer to pay a portion of your pre-tax salary as an extra contribution to super (concessional contribution). This is commonly known as a salary sacrifice. It can be tax-effective if you earn more than $37,000 per year.

Concessional contributions are capped at $25,000 per financial year. This means the total of your employer and salary sacrificed contributions must not be more than $25,000 each year. If you contribute more than this, you may have to pay extra tax. See salary sacrifice super for more information.

Low-income superannuation tax offset

If you earn $37,000 or less, you may get a ‘low-income superannuation tax offset’ (LISTO) from the government. The amount, up to $500 annually, will be 15% of the concessional contributions you or your employer made to your super account during the financial year.

You don’t need to do anything, the ATO will work out your eligibility and pay your low-income super tax offset directly into your super account. Make sure your super fund has your tax file number (TFN) so you don’t miss out on the payment.

Make after-tax super contributions

Simply deposit your personal money into your super. These are called after-tax super contributions (non-concessional contributions) because you have already paid tax on the money. This is different from salary sacrificing, which happens before your income is taxed.

You cannot claim a tax deduction for contributions that you want to keep as non-concessional contributions. The cap for non-concessional contributions is $100,000 per financial year. If you are under age 65 you can bring forward up to 2 years of the non-concessional cap, allowing you to contribute up to $300,000 at a time, depending on your super balance. If you contribute more than this, you may have to pay extra tax. See the ATO’s webpage on non-concessional contributions.

Government co-contributions

If you earn less than $52,697 per year (before tax) and make after-tax super contributions, whether small regular contributions or irregular lump sums, you may be eligible for a matching contribution from the government. This is called the government co-contribution.

If you earn less than $37,697 the maximum co-contribution is $500 based on 50c from the government for every $1 you contribute. The amount of the co-contribution reduces as your earnings increase.

To receive the co-contribution you will need to lodge a tax return for the year. The government will then work out how much you are entitled to. If you are eligible, the government will pay the co-contribution directly to your fund. See the ATO’s webpage on super co-contributions for more details.

If you’re in the early stages of your career you might want to consider setting up a separate retirement account to take advantage of decades of compound investment growth. It’s also worth considering the negative compounding effect; how much money are you giving up, long-term, by not investing spare money now?

There’s a reason why financial advisers often suggest to increase your retirement contributions by 1% every year, but even that number shouldn’t be taken as a default—if you can afford to increase your contributions by 5%, or literally any other number, do it.

And don’t tell yourself you’re going to do it tomorrow, because we all know what that means. Tell yourself you’re going to calculate your optimal retirement savings rate today, and if today doesn’t work, put it on the calendar for the near future. (I’ll suggest Thursday as a default day that you can now schedule around.)

Oh, and don’t forget to find and consolidate your lost super from previous employers. It’s definitely better to do this sooner rather than later – otherwise you risk fees eating up your super across multiple accounts. ASIC has a handy guide explaining how to track your super down.

Additional reporting by Nicole Dieker.