NOTE: we do our best to share general resources so you can do your own research, but keep in mind this information doesn’t consider your personal circumstances, objectives or needs. When it comes to investing in your super, you should consider if it’s appropriate, read PDS and TMDs and reach out to a financial advisor and tax accountant. When investing, there may be tax implications and you should get advice from a licensed tax adviser and financial advisor. .
Super is one of those things we tend to set and forget. We trust that it’ll grow over time and be there when we need it. But, as mentioned in our article on how to calculate your after-tax contributions , the employer Superannuation Guarantee (SG) contributions are not always enough. You’re probably here because you realise that and want to do something about it. If you’re asking whether you should contribute extra to super, you’re already a step ahead of most Australians.
Many people put super in the “too hard” basket. Its complexity, together with a purpose tied to a distant life stage, makes it seem less urgent. Instead, we focus on the banking, borrowing and investing areas of our finances. These are all important, but super is also a crucial part of our net wealth. Yet, it tends to be the forgotten one. I’m also guilty of this, and I worked in the super industry for eight years!
To grow your super so it’s enough for your retirement, you may want to think about contributing extra to your super account. I cover more on the factors to consider in this article.
How you can contribute extra to super
If you want to contribute extra to super, you have a few options. These include:
- Salary sacrifice contributions – these are paid by your employer from your pre-tax salary when you agree to contribute extra amounts above the SG contribution. Salary sacrifice contributions are taxed at a concessional rate of 15% within your super account.
- After-tax contributions – these are the additional amounts you contribute to your super from your after-tax income. These contributions aren’t taxed when they hit your super account .
- Spouse contributions – you can also split your employer super contributions with your spouse if one of you earns little to no income. There are tax offsets associated with these types of contributions that you may be eligible for.
Benefits of extra contributions
You can access several benefits when you contribute extra to super. The obvious one is that you boost your retirement savings as you add more to your nest egg. This can help you create a comfortable retirement, if that’s what you aspire to.
Contributing extra could also result in higher earnings on your super balance (where markets work in your favour). For example, say you have a balance of $95,000 and your investment earns 12% over the year. By the end of that year, you now have $106,400 (not considering fees). If you had contributed $5,000 extra at the beginning of the year, you’d have $112,000 by the end of the year.
As I said before, salary sacrifice (before-tax) contributions are taxed at only 15%. This means that by making these contributions, you effectively reduce your taxable income. Less taxes? Yes please!
Making after-tax (a.k.a. non-concessional contributions) can also give you access to tax deductions . Now, we’re not tax experts, so you’ll want to read more on the Australian Taxation Office website and talk to your financial adviser.
Risks and considerations
On the flip side, there are some factors to consider for when you contribute extra to super.
Contributing more to super means you have less in your pocket today. To manage your cash flow, it’s worth working these extra contributions into your personal budget. Consider whether it fits in with your broader financial goals. Prioritisation and planning are key!
I mentioned earlier that if you contribute extra to super, it could mean higher earnings. Like any investment, this could also head in the other direction in a market downturn.
If you choose to contribute after-tax, you also need to watch out for the non-concessional contributions cap. Exceeding the cap means paying extra tax . The ATO shares a few tips to help you keep track.
Deciding whether you should contribute extra to super
Okay, so now you know how you can contribute extra to super, the benefits, and the risks. How do you decide whether this strategy is for you?
Here are a few questions you can ask:
- What lifestyle do you want to enjoy in retirement?
- Is your projected super enough to support this lifestyle?
- Are you only investing through super, or do you also invest through other channels (e.g. shares, ETFs, property)?
- Do you have enough cash flow to contribute extra to super without sacrificing your financial goals?
Talking through these questions with a qualified financial adviser is also a good idea. Even if you decide to make tiny additional contributions, those small amounts can make a big difference over time.
