We all want a good retirement. You want confidence that, when you say goodbye to earning a paycheck, you won’t run out of money one day. A critical part of having that confidence is successful retirement planning, which starts with maximising superannuation.
Most people know that superannuation is the best way to save towards retirement, yet many people don’t know that there are ways to maximise your superannuation savings through increasing voluntary contributions.
So let’s talk about the power of voluntary contributions, and how to master them.
What Are Voluntary Superannuation Contributions?
Voluntary super contributions are extra contributions you make outside of the mandated super guarantee that your employer deposits for you. There are a few methods of making voluntary contributions: extra pre-tax employer contributions or salary sacrificing, or by making personal after-tax or non-concessional contributions.
One of the reasons that making additional super contributions can be so valuable is because of compounding returns. If your superfund is performing well, or you have a good super investment strategy, you investment in your retirement fund may greatly pay off over time as you see the compounded benefits.
Concessional Contributions (Before Tax)
These are salary sacrifice contributions that are added to your super before your income tax has been deducted. Part of this is done by your employer on your behalf through compulsory contributions (super guarantee), or salary packaging, but you can also choose to make extra concessional contributions. The concessional contribution limit is $30,000 per year (updated from $27,500 in the 2023-24 Financial Year) including employer contributions.
Pre-tax contributions are taxed at 15% (for those on incomes up to $250,000) when added to your super account, instead of your marginal income tax rate. This is usually a lower rate than you’re paying in income tax, making contributing to super a great way of lowering your taxable income.
Non-concessional Contributions (After-tax)
After-tax (non-concessional) contributions are made after income tax has been deducted. You can make these as smaller regular voluntary contributions through your employer, or make lump-sum contributions to your account at any time.
The non-concessional contributions cap is much higher – $120,000 per financial year (provided your super balance has not reached the transfer balance cap of $1.9M). However, to accommodate larger contributions, people under age 65 are allowed to bring forward two years of contributions, up to a total of $360,000 ($120,000 each year x 3 years total for bring forward from 1st July 2024 onwards). For example, a person under age 65 can make up to $360,000 of contributions in one financial year, but will then be unable to make further non-concessional contributions for the next two financial year.
Just like the superannuation payments you receive from your employer, anything you add to your chosen account will utilise compounding interest to grow your investment return over time.
We used a contributions calculator to get the following estimate: if you added $5,000 annually to your super from the age of 35 to 67, you would increase your retirement fund balance by 48%, from $638,476 to $948,495. This includes additional compounded returns of $150,000.
After-tax contributions are taxed at your marginal tax rate before entering your super account. However, if you haven’t reached your non-concessional limit, you can claim a tax deduction on non-concessional contributions, which effectively make them ‘concessional’ for tax purposes. By claiming a tax deduction, you’ll pay just 15% tax, and receive the rest back in your tax return, but these also have to be within the yearly limit of $30,000.
The Benefits of Voluntary Contributions
To put it simply: voluntarily growing your super through concessional and non-concessional contributions is one of the most tax-effective ways you can grow your wealth for retirement while lowering your immediate tax obligations.
Tax Benefits of Super Contributions for High-income Earners
Personal super contributions, either through salary sacrifice or voluntary contributions, are especially useful for people who are on higher marginal tax rates. Your super is taxed at 15%, or 30% if you earn over $250,000, which is usually significantly less than your usual income tax rate (for example, marginal tax brackets are 37% for incomes $135,000 to $190,000 and 45% for incomes over $190,000 per annum).
However, high-income earners do receive an additional tax on super once the balance of their fund exceeds $3 million. From 1 July 2025, an additional 15% tax on the portion of investment earnings exceeding $3 million will apply.
Using concessional contributions can effectively reduce your taxable income in practical ways during your working life. With the potential to pay up to 47% tax on investment earnings outside super, it makes sense to invest through super, where you only pay 15%.
But Don’t Forget the Contributions Cap
We mentioned that concessional contributions have a limit of $30,000, while the non-concessional limit is $120,000 (these limits are updated as from 1 July 2024). To ensure fairness and keep pace with economic changes, this cap will now be reviewed every year.
Remember, if you exceed this cap within a financial year, you might find yourself on the hook for extra tax. It’s all about finding that sweet spot—maximising your super contributions without going over the limit!
Navigating Superannuation Contributions for Low Income Earners
Get a Boost with the Low-Income Super Tax Offset (LISTO)
Good news if you’re earning up to $37,000 a year—you might be in line for a little extra boost to your super savings! Eligible low-income earners can receive a Government co-contribution of up to $500 directly into their super account. There’s no need for extra paperwork. Just ensure your super fund has your tax file number (TFN), and you’re all set.
The Low-Income Super Tax Offset is designed so that if you’re on a lower income, you aren’t paying a higher rate of tax on your super contributions than on your actual income. To put it simply, LISTO acts like a kind of rebate, capping off at $500, which corresponds to the 15% tax paid on your pre-tax super contributions. You can check eligibility criteria for the LISTO on the ATO website.
Tax Offset for Spouse Contributions
If your partner is earning a low income or not working at the moment, you can boost their super by making spouse contributions. Not only is this a great way to ensure both of you are building your retirement savings, but it could also score you a tax offset. If your spouse earns below $40,000 and you contribute to their super, you can claim a tax offset of up to 18% (maximum of $540) on the first $3,000 you put in. It’s a win-win for your finances and your future together.
After-Tax Contributions Can Also Score a Co-Contribution
Personal after-tax contributions may also qualify you for a Government co-contribution, and every dollar can count. Even if you’re on a low income, making personal contributions to your super can be a smart way to save for retirement. It’s all about the long game—every little bit you contribute now could make a big difference down the track thanks to compounding returns.
When to Make Voluntary Contributions
The timing of your super contributions can make a difference, both for tax purposes as well as for maximising your retirement.
To Maximise Tax Benefits
- Before EOFY: In a particular financial year, you can ensure you’ve maximised your superannuation contribution by finalising all contributions before 30 June. Keep in mind, the money has to have been received in your super account by the end of the financial year (check with your super provider on their cut-off date to get this right). Deductible contributions can also be claimed in your income tax return.
- Spousal Contributions: Plan ahead for making split contributions or or contributions into your spouse’s account. It’s wise to keep track of the income and tax rates of both of you to make sure you’re making the right choices.
Getting Ready for Retirement or in Retirement
- Downsizer contributions: If you are 55 years or older and decide to sell your principal place of residence to “downsize”. You can add up to $300k per person from the proceeds of the sale into your super fund. You must have owned the property for 10 years and it must be fully or partially CGT exempt. This doesn’t count towards the contribution cap ($120,000). Just keep in mind this counts towards your transfer balance cap (and therefore your eligibility for the age pension).
- Before you stop working completely: Make the most of the time before you stop working completely to make personal contributions and claim them as tax deductions. You’ll have to pass a work test to claim a tax deduction on personal contributions from the age of 67-74. The work test is that you must have been gainfully employed for at least 40 hours within a consecutive 30-day period in the financial year.
- Before you turn 75: You won’t be able to claim a tax deduction on personal contributions after the age of 75 (technically, no later than 28 days after the month of your 75th birthday).
- When you’ve got a lump sum to deposit: If you’re under 75, and have a super balance under $1.68M, you can bring forward your superannuation caps from the future 2 years, thus enabling you to contribute a much larger sum to your super at one time. Any remaining balance that you don’t use can still be used in the following years.
How to Use Carry-Forward Contributions
It seems like you’re limited to the concessional cap of $30,000 per year, however, the carry-forward rule is good news for those who haven’t fully utilised their cap in previous years. This is like having savings catch-up mechanism at your disposal, giving you the chance to inject larger sums into your super without exceeding your annual limit.
For example, let’s say you only managed to contribute $15,000 last year. With the carry-forward rule, you now have the opportunity to contribute up to $45,000 this year—your standard $30,000 cap plus the $15,000 you didn’t use from the previous year. You can go back over your previous 5 years and use any unused portion from these years.
This is particularly helpful if you have gotten a large sum of money or income that would cause you pay a lot of tax – cut down on tax while boosting your retirement income!
The key things you need to know
- Unused cap amounts will expire after a rolling five-year period.
- The total super balance across all your super accounts must be less than $500,000 at the end of the financial year before you use the carry–forward rule
How to Make Voluntary Super Contributions
There are two primary ways of making contributions: In increments through salary sacrificing, or in a lump sum from cash.
Making the Most of Salary Sacrificing
If you can afford to sacrifice some of your take-home pay, redirect a portion of your pre-tax salary into your super account by salary sacrificing, to reach the contribution cap (and create extra money for your retirement fund!).
- Check with your employer: Confirm whether your workplace offers salary sacrifice, and discuss any possible impacts on your current salary and benefits.
- Complete the paperwork: Fill out the necessary superannuation contribution form and provide it to your employer or their payroll department to initiate the process.
Set up your own Lump-Sum Contributions
- Direct debit contributions: Set up a one-off or recurring direct debit from your bank account to contribute after-tax pay to your super. Choose a schedule that suits you and steadily increase your super balance.
- BPAY payments: Utilise BPAY for one-off or regular super contributions. Locate your unique BPAY details within your super account’s information to make transfers directly from your bank.
Are voluntary super contributions tax-deductible?
Depending on which type of contribution you make, you may be able to claim a tax deduction. You can claim a tax deduction for:
- Personal/ voluntary contributions
- Carry-forward unused caps
- Cap inclusions: The concessional contributions limit ($30,000) includes employer super guarantee payments and any salary sacrificed amounts. You can only claim tax on your own additional contributions outside of these.
To claim a tax deduction for your Voluntary Super Contribution, you’ll need to complete a Notice of Intent to Claim and send it to your superannuation fund, prior to completing your tax return.
If you’d like financial advice on maximising your super, our team of superannuation advisors can help.
