I don’t know about you, but whenever I used to hear the expression maximising your super contributions I used to think “I don’t earn enough for this to even be on my radar.”
It sounded so glamorous and elite (as far as finance terms go), and just so far from my reality.
As of 1 July 2017, I am very pleased to announce that this is going to be very achievable. There are two big things that are changing, and they’re making this a reality.
The rules are changing
From 1 July 2017, the concessional contribution cap is coming down to just $25,000 p.a. (previously $30,000)!
Remember that concessional contributions include your salary guarantee contributions (SGC), which is what your employer pays into your super. For someone earning $140,000 p.a., your SGC will already take up over 50% of the allowable concessional contributions! For those earning over $206,480 p.a., the SGC caps out at $19,615.60 which means you’re at almost 80% of the cap.
So when thinking of maximising your contributions, you’re actually only talking about bridging the gap between what your employer is paying for you, and $25,000. So it’s not a lot!
June 2017 will be the last month that that bloody HELP-DEBT (I still call it HECS out of old habit) will deduct from my salary. To say that I am excited about this is an understatement. I have waited years for this moment.
What does this mean for me? Some serious cash flow is returning my hands. Thank you ATO!
What does it really mean? It feels like I’m getting an 8% pay rise and I get to play with more money.
As we move through our 20s and into our 30s, more and more Gen Y are experiencing this wonderful moment. And we should use it to our advantage!
If you consider the point above, and the small amount of contributions we’re actually allowed to make without going over the cap, these newly freed funds are perfect for me to become a contribution-maximising superstar. And still have funds to spare to boost the budget for my annual holidays moving forward!
Let’s look at some examples
Sam is earning $120,000 p.a. plus $11,400 p.a. in superannuation contributions. Until recently, 8% of his income was going towards his student debt ($9,600) but that’s now cleared. Yes!
To maximise his concessional contributions into super, he needs to contribute an extra $13,600 p.a., which is only $4,000 p.a. In addition to redirecting his recently liberated HECS-DEBT funds. In after tax dollars, that’s only approx. $200 p.m. impact to his bank balance. Good trade, we’ll take that!
Alex is earning $180,000 p.a. plus $17,100 p.a. superannuation contributions. 8% of her income was going towards student debt ($14,400 p.a.) but she’s just paid that off.
The gap to maximise her concessional contributions is $7,900 which is less than her debt repayments. By redirecting this cash flow, she can maximise her concessional contributions and still have approx. $330 p.m. extra cash flow each month (after tax). Good result!
Don’t forget the tax impact
One of the main reasons making additional contributions into your superannuation fund is the tax savings you’ll make.
All concessional contributions are taxed at a flat rate of 15%. To make matters even more attractive, any income made in the future from your superannuation investments is also only taxed at 15%. When comparing this with the marginal rate of tax you pay on your income, making additional contributions equates to free money and is substantially more appealing.
The table below shows the impact of salary sacrificing an additional $10,000 a year into your super fund, what the tax saving is, and what the net impact to your weekly income actually is:
|Salary Bracket||Marginal Tax Rate||Tax payable as salary||Tax payable as super contribution||Tax saved||Weekly impact|
$18,201 ”“ $37,000
$37,001 ”“ $87,000
$87,001 ”“ $180,000
If you can afford to give up between $100 and $150 a week from your take-home pay now, and can continue to do this for your working life (let’s say approximately 30 more years), you add an estimated $850,000+ to your superannuation balance*. That is a huge difference over the long term for a reasonably small sacrifice.
*based on contributions of $10,000 p.a. at a continued 15% tax rate, and average annual investment returns of 7%
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Disclaimer: all information contained within this article is of a general nature. Do not rely upon it when making financial decisions. Please consult a professional financial advisor or planner (like us!) before acting.