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Hewison Insights

Should you make additional contributions to superannuation?

Nathan Lear
Partner & Wealth Adviser
4 Dec 2023

People of all ages are often faced with the question, should I make additional contributions to the superannuation environment? All working Australians benefit from the compulsory superannuation system in Australia, but for many, additional contributions are required to make for a comfortable retirement. The generous tax conditions that the superannuation environment enjoys makes it an enticing structure to own your investments.

Before even thinking about whether to make additional superannuation contributions, there are a few major factors to consider when faced with this decision. For example, do you have a mortgage or other debt that requires repayment? Do you have spare cash flow to make additional super contributions on a regular basis, or a chunk of capital that can be contributed to superannuation in one go? How old are you and in how many years will you have access to your superannuation benefits? Many of these questions require careful consideration and planning with your trusted financial adviser.

There are two main types of contributions that can be made to superannuation:

  • Non-Concessional Contributions which are post-tax and subject to a cap of $110,000 per financial year. Additionally, two future years can be brought forward allowing contributions of up to $330,000. No tax is applied to these contributions when made to superannuation. Non-Concessional Contributions may be useful if a large chuck of cash has been saved or you are coming into money from the sale of an asset or inheritance.
  • Concessional Contributions which are pre-tax and subject to a cap of $27,500 per financial year. This includes mandated employer contributions and salary sacrifice. These contributions are taxed at the flat rate of 15% which in many cases is lower than one’s marginal tax rate providing a tax saving.

Benefits of investing inside superannuation
Tax Efficiency – Apart from the concessional tax treatment of making superannuation contributions as per above, investment earnings within the superannuation environment in accumulation phase are taxed at a flat rate of 15%. This is often lower compared to individual marginal tax rates. In short, this often makes it more tax effective to invest inside the superannuation environment rather than outside. For those over 60 and in pension phase, this tax rate drops to 0% up to the Transfer Balance Cap which currently sits at $1.9 million.

Long term investment focus – Given superannuation funds are preserved until at least age 60, for many this helps to instil a long-term investing mentality and prevents the desire for many to withdraw funds.

A main drawback of investing funds in superannuation is the preservation or restricted access until at least age 60. Therefore, if you plan to retire before reaching age 60, you must be aware these funds would not be accessible.

Further, there are restrictions on how much one can accumulate in superannuation before additional contributions are restricted. Therefore, careful planning may be required to maximise your contributions. As mentioned above, once you reach your Transfer Balance Cap, no additional Non-Concessional Contributions can be made.

Investment Strategy – Superannuation is just a structure, so it is important that you have an appropriate strategy with quality investments whether you are selecting an industry fund, retail fund or making your own investments in a Self-Managed Superannuation Fund.

Balancing the tax advantages of superannuation with the flexibility of access is a delicate art.

However, by carefully considering your personal financial situation, financial goals, and time horizon, you can tailor a strategy that optimizes your wealth accumulation.