When it comes to building a brighter financial future, superannuation is one of the biggest investments you may make in your lifetime. In fact, for the average Australian, your superannuation is one of the keys to ensuring you’ll be able to enjoy a retirement free from the stress of worrying about money.
But did you know that relying on the contributions your employer is legally obligated to make on your behalf may not be enough on their own to achieve said stress-free retirement?
That’s why the Australian government has made it easy to contribute extra to your super fund through voluntary super contributions.
For those earning a higher-than-average income, contributing voluntarily to your chosen fund can also help you to lower your tax obligations as the rate at which your contributions are taxed may be less than your marginal tax rate.
But what exactly are the benefits of voluntarily adding to your super and how can they help you achieve a brighter financial future?
This guide covers:
- How voluntary super contributions work
- The difference between concessional and non-concessional contributions
- Who benefits from making voluntary super contributions
- How you can benefit from making voluntary contributions
And that’s just the beginning.
If you’d like to know more about how voluntarily adding to super may benefit you and your personal financial circumstances, our team of expert financial advisors are more than happy to help.
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How Do Voluntary Super Contributions Work?
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.
This means that, depending on which fund you have your superannuation in as well as your investment strategy, the initial investment you make now through voluntarily contributing to your chosen account may greatly pay off over time.
There are two types of super contributions you can make:
Concessional Contributions
Concessional contributions include those made from your pre-tax pay into your super account. This is generally done by your employer on your behalf through salary sacrifice or salary packaging, but you can also make extra concessional contributions on your own.
All concessional super contributions are usually taxed at a rate of 15% for those on incomes of up to $250,000. This is generally a lower rate than the marginal tax rate you may pay on your income, making contributing to your chosen account a way to lower the amount of income on which you are obligated to pay said higher rate.
However, it should be noted that for those earning more than $250,000, an additional 15% tax may be payable on some or all of your concessional contributions. There is also a limit on the amount of extra you can add to your chosen account in a year, with the combined total of these and your employer’s additions not allowed to be more than $25,000 a year. If you exceed this $25,000 limit, you may be liable to pay extra tax.
Non-Concessional Contributions
In addition to concessional super contributions, you can also opt to top up your chosen account from your after-tax pay. These additions are known as non-concessional contributions as you have already paid tax on this money through your income tax.
The limit for how much you can contribute to your chosen fund through non-concessional additions is $100,000 per financial year, which is much higher than the concessional contribution limit of $25,000.
Once inside your fund any non-concessional contributions you make aren’t taxed and upon reaching your desired retirement age these additions can be accessed tax-free. This makes investing in your super one of the most tax-effective investment options available to the everyday worker in Australia.
Generally speaking, according to MoneySmart, making both concessional and non-concessional contributions is tax-effective for anyone earning more than $37,000 a year.
Concessional contributions help you to lower your tax obligations in your immediate present by enabling you to take advantage of a lower tax rate, while non-concessional contributions allow you to grow your wealth over time – which can then be accessed tax-free upon retirement. And this is all at the same time as they help you to achieve a stress-free retirement by working towards enabling you to enjoy your dream retirement lifestyle.
Think of it like this:
You earn $90,000 before tax, not including your employer’s contribution on your behalf. If you decided to pay $10,000 of your income into your chosen fund through concessional contributions, you’ll end up saving approximately $3450 in tax. This extra $3450 you would have paid in tax is instead invested in your super, which in turn will continue to grow as you get older and enable you to live the retirement lifestyle you’ve always dreamed of.^
Who Benefits From Making Voluntary Super Contributions?
We mentioned it before, but those with a higher-than-average income who are looking to lower their tax obligations may benefit the most from voluntarily contributing to their chosen fund. This is especially true if your marginal tax rate is above 15%, as making concessional contributions would allow you to utilise a lower tax rate.
Specifically speaking, you may be eligible to make tax-deductible super contributions if you:
- Earn a salary or wages as an employee
- Earn an investment income
- Receive a government pension or allowance
- Receive a partnership or trust distribution
- Earn income from foreign sources
- Earn superannuation income
If you’re self-employed, all concessional contributions are also tax deductible.
However, this being said, there are also limitations on who can claim a tax deduction. In order to be eligible to claim a tax deduction on your voluntary super contributions, you must also:
- Not be older than 75
- Meet the work test if you are aged 65 to 74, which claims you must be working a minimum of 40 hours in any 30 consecutive day period to make voluntary contributions to your super account.
- Not be using your voluntary contributions to help fund an existing super income stream or pension
- Not be splitting your contributions with your spouse, either married or de facto
- Not be making contributions to an untaxed super fund or a Commonwealth public sector defined fund
It’s a common belief that, in order to make the most of the tax advantages afforded by concessional super contributions, your contributions must be made in increments through salary sacrificing. However, it is entirely possible – and in some cases, even advisable – to make contributions from lump sums held in cash in your bank account.
This is where our team of superannuation advisors can help, by providing you with the expert knowledge and guidance you need to decide what the right method of contributing to super is for your particular financial circumstances.
They can also help assess your current financial situation and create a plan for ensuring that your super is being maximised to help you achieve your dream financial future.
Want To Start Maximizing Your Super? We Can Help
To put it simply: voluntarily contributing to 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.
But, just like many aspects of your financial world, getting started creating a superannuation plan that will ensure you’re able to enjoy the comfortable and stress-free retirement you’ve always dreamed of can be more complicated than you may first expect.
But it doesn’t have to be.
With an expert superannuation advisor by your side, you’ll never have to worry about whether you could be doing more to optimise your superannuation contributions or whether you’re on track to achieve your financial goals.
Our team of superannuation advisors is here to ensure you’ll always be on track to achieve a brighter financial future.
Interested in learning more about how making voluntary super contributions can help you achieve your dream retirement?
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^ These figures have been provided as a general example only and are not based on any real-life scenarios.
