The choice between spending now or later will always depend on an individual’s circumstances. But for anyone close to retirement, there are definite advantages to consider making sacrifices to put more into superannuation.
The money invested within the superannuation system carries with it tax benefits which if used properly can result in a substantially higher capital balance and income in retirement.
Someone on the highest marginal tax rate who puts pre-tax dollars into superannuation is investing 85 cents of every dollar earned rather than 55 cents of every dollar earned.
In addition, any income generated inside superannuation is also taxed at 15 per cent, rather than at the individual’s marginal tax rate. Once a person reaches age 60 and retires, or age 65 if they haven’t retired, they can withdraw money from their superannuation account free of tax.
The government trade-off to the tax advantages of saving for retirement in superannuation has been to restrict access to superannuation savings until retirement and to limit the amount of pre-tax dollars that can be contributed each year.
Exercise caution to avoid penalties
From 1 July 2012 the cap on concessional contributions is $25,000 a year for everyone, irrespective of age.
In previous years those aged over 50 could contribute up to $50,000 a year, which may have made it easier to save more in superannuation a few years out from retirement.
Anyone contributing above the new concessional cap will be subject to penalty tax rates, regardless of whether it was an innocent mistake. Seeking advice from a financial adviser on your superannuation contribution strategy can help to ensure that you remain within the contribution caps.
Concessional contributions can come from the employer compulsory Superannuation Guarantee, additional salary sacrifice contributions and personal contributions where a tax deduction has been claimed – such as the self employed.
Contributions can also include an employer paid portion of an employee’s insurance premium held in superannuation or payment of insurance premiums by an individual for insurance only superannuation products.
People aged 50 and above who already had in place salary sacrifice arrangements with their employer, based on the previous $50,000 cap, should be particularly mindful of the changes. They will need to change their existing contribution levels to ensure they do not breach their contribution caps and they should speak to their adviser about alternative retirement saving plans.
Contributions to superannuation can be made from after tax dollars, but there are also limits around this. Generally an individual can make non-concessional contributions of up to $150,000 each year or $450,000 in a three year period up until age 65.
Anyone who is unsure whether their concessional or non-concessional contributions may breach the annual caps should speak with their adviser.