Increasing your superannuation contributions can enhance your nest egg for retirement, yet with numerous pressing expenses vying for attention, it may not always be clear when it’s best to make additional payments into your fund.
Based on ASIC's Moneysmart, someone who starts at age 30 by adding an additional $20 each week might end up with $50,000 more when they retire. Additionally, there are potential tax benefits associated with making extra superannuation contributions.
However, securing funds to save can be challenging, particularly within today’s financial climate, and boosting contributions to your superannuation might not always be the best strategy.
We consulted with two specialists to delve into when this approach is advantageous and assist you in grasping the possible advantages and disadvantages.
First, cover the basics
Kate McCallum serves as a financial advisor and is also one of the co-authors of The Joy of Money.
According to Ms McCallum, if you find yourself in your 20s, 30s, or 40s, you may encounter significant financial pressures. These could involve paying rent, setting aside money for a home purchase, managing mortgage obligations, covering educational fees, and handling everyday living costs.
If you're carrying consumer debts like credit card balances or personal loans, it makes more sense to focus on reducing those before increasing your superannuation contributions.
This is due to the fact that the interest rates on these items are quite high, and clearing them off offers a guaranteed return.
It's equally advisable to possess an emergency fund — preferably enough to cover at least 90 days of living costs.
In addition to providing mental tranquility, this can also prevent the necessity of taking on debt for unforeseen costs.
Why young individuals ought to ponder thoroughly before contributing additional funds to their superannuation.
Ms McCallum emphasizes the importance of assessing your entire financial position and objectives prior to thinking about increasing your superannuation contributions.
Significantly, the majority of individuals cannot withdraw their superannuation until they attain their preservation age, ranging from 55 to 60 years old, based on their birth date.
Therefore, if you're 30 years old and decide to make a voluntary contribution to your superannuation, you might be tying up those funds for over three decades.
Ms McCallum indicates that voluntary superannuation contributions tend to be more feasible for individuals above 45 years old, as they won't have to await fund access for too long.
Rather than doing so, she recommends that young individuals concentrate on other important areas and depend on their employer's obligatory superannuation payments.
"If you’re in your 20s, 30s, or possibly even into your early 40s, it’s sensible to let the super guarantee function as intended and allocate any extra cash flow to other areas, providing greater financial leeway," she explains.
If you're looking to invest but also keep your funds accessible, consider doing so outside of your superannuation. You could choose to put the money into a managed fund instead. exchange-traded fund (ETF) instead.
Alternatively, if you own a home with a mortgage, you might consider placing the funds into an offset or redraw account.
How making voluntary superannuation contributions might assist you in reducing your tax burden
You have the option to contribute "concessionally" to your super account by arranging a salary sacrifice with your employer or by directly transferring funds into your super account and then claiming a tax deduction.
This approach may seem appealing since these contributions face a tax rate of just 15%, significantly lower compared to the 30% paid by individuals earning a typical salary in Australia.
Therefore, as your earnings increase, contributing extra to your super becomes more appealing due to the increased tax advantage.
Is it advisable to contribute to your superannuation when you're stepping back from work for a period?
If you're stepping away from work due to having a child or providing care for another person, you may have concerns about your superannuation balance and whether you should make additional contributions.
Even though you can continue adding to your super during these times, the lower income might lessen the possible tax advantages of making concessional contributions.
If your income is less than $40,000 and you have a partner, this may apply to them as well. contribute to your superannuation on your behalf and apply for a tax refund of up to $540.
Another approach some partners adopt is referred to as contribution splitting This includes transferring a portion of one partner’s superannuation contributions to their spouse.
How contributing more to your superannuation can assist you in saving up for your first house.
Although many individuals aren't able to access their superannuation until reaching their 60s, several exemptions do apply.
The FHSS scheme enables first-time homebuyers to withdraw up to $50,000 in voluntary contributions along with their associated earnings, which can be used for a down payment.
The scheme has complex rules Including aspects related to withdrawals, which is why it hasn’t gained much popularity. However, independent financial advisor Jacie Taylor suggests that this approach can be beneficial for individuals aiming to save for a deposit.
"What a fantastic initiative this is, but unfortunately, it hasn’t gained enough awareness," Ms Taylor states.
Remember that failing to buy a property after withdrawing funds from the scheme may result in tax penalties.
You might have the option to increase your superannuation without making additional payments.
If you can't make additional contributions, there are still various methods to ensure your superannuation is performing well for you.
Ms. Taylor emphasizes the significance of examining how your superannuation is invested and the fees you're charged.
Ms Taylor suggests that if you're younger, you might consider opting for higher growth investment options with your super, as these usually offer greater returns over an extended period.
"This really matters for younger individuals," she states.
If you're uncertain whether a voluntary super contribution strategy suits your needs, it may be beneficial to consult with a financial advisor or planner.
The content of this article provides only general details. It would be wise to seek individualized professional guidance tailored to your specific situation.