The new financial year is upon us, and there’s never been a better time to think about starting on the right foot with superannuation concessional contributions.
Experts suggest that to retire comfortably, you’ll need at least $1 million in superannuation. However, according to Industry Super, the current average super balance for a 66-year-old is $392,805 for men, and $349,947 for women.
Further, with roughly 15% of the working population dipping into their super thanks to the government’s early release scheme, this number may be even lower for some Aussies.
While this average balance should improve over the next few years thanks to the 1992 Superannuation Guarantee, in which 9.5% of working Australians pre-tax income now goes into super, the cost of living will rise too. Meaning you may need more super than you expect.
This is why prioritising your superannuation now through salary sacrificing can be so crucial in setting up a financially stable future.
The most common types of voluntary super contributions are:
- Salary sacrificing – a nominated part of your income is paid directly into your super account by your employer and is taxed at a lower rate than your pay.
- Direct contribution – you deposit directly into your super account. You then notify your fund via an ATO form and claim a tax deduction at the end of the financial year. Also known as non-concessional contributions.
Here are 5 reasons why you may want to consider salary sacrificing into your super fund for the new financial year:
1. You may pay less tax
Salary sacrificing your pre-tax income, also known as concessional contributions, is one of the more popular ways Australians can boost their nest eggs.
While it may mean having a little less pay now, contributing just an extra $50 a month may make a significant difference to your final balance. This is the difference between skipping one dinner out with a friend or partner per month and having potentially thousands of dollars more at retirement.
How much you contribute is up to you but there is a limit. Your regular contributions and your salary sacrificed contributions are capped at $25,000 per financial year.
These contributions are taxed at 15%, which is typically lower than most people’s marginal tax rate.
Put simply, you generally end up paying less tax while growing your super balance.
2. You’ve taken up the superannuation early release scheme
Due to the economic impacts of COVID-19, the government has allowed for struggling Aussies to dip into their super funds through its early release scheme.
APRA figures released on Monday show that between 20 April, when the scheme began, and 14 June, $15.9 billion in superannuation has been withdrawn by 2.1 million applicants.
While there is a withdrawal cap of $10,000 this financial year, the average payment was $7,486.
Superannuation uses compounding interest to grow your balance for retirement. Although this may seem insignificant today, taking out this money may have serious impacts on the final balance of your retirement fund.
If, post COVID-19, you’re now in a better financial position, you may want to consider salary sacrificing into your super to make up for these lost funds.
3. You’re trying to beat the gender super gap
Did you know women retire with an average of 47% less super than men, according to Industry Super?
That is $85,000 women are missing out on, on average, due to a variety of factors such as taking time out of work for children and caretaking for sick family.
Using ASIC’s MoneySmart Retirement Planner, we can see that for the average woman taking a career break over a number of years, her final super balance could be over $150,000 worse off.
|Time taken out of workforce||Final balance||Super lost|
|No career break||
Source: MoneySmart Retirement Calculator. Notes: Based on average woman who has first child at age 29. Average income based on ABS average full-time weekly ordinary time earnings, November 2019.
If you’re a woman in the workforce, you may want to consider salary sacrificing as a means of beating the gap – even if you never plan on taking time off.
4. Your partner is taking time out of the workforce
If your partner is planning on taking time out of the workforce, or is on a low income, they could be missing out on thousands of dollars in superannuation.
However, if you’re still working, there is a way you can boost their super through spouse contributions or super splitting:
- Spouse contributions – You make voluntary contributions to your spouse’s superannuation and may be able to claim an 18% tax offset on contributions up to $3,000. If you contribute more than $3,000, you won’t receive the spouse contribution tax offset.
- Contribution splitting – In addition to spouse contributions, you can also allocate some of your own superannuation to be put into your spouse’s super account.
For the latter, you can split either your standard employer contributions, or any potential after tax contributions.
5. You’re not confident in the economy
Australia is in its first recession in almost 30 years, and the stock market has certainly been reflecting our general economic uncertainty over the last few months.
For example, in the last 6 months, the ASX 200 has fallen from 6,785.10 to 5,938.50. This means that, depending on how your portfolio is invested, your superannuation balance has potentially taken a hit.
You may want to consider making concessional contributions to help get your super balance back on track.
Has the recession left you no longer confident in your superannuation fund? You may be considering comparing new funds.
The best superannuation fund for you is the one you believe will offer you the best value. This may mean:
- The fund that has delivered the highest net returns over the past five years;
- The fund that has earned the highest approval ratings on online review sites; and
- The fund that has the most appealing investment options.
The definition of ‘best’ will differ from person to person. ASIC’s MoneySmart website suggests looking for a super fund that offers strong performance, low fees, insurance, investment options and other services.
Disclaimer: This article contains general information only and is not intended to be used as personal advice.
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