Why super is still super – strategies for tax-effective investing

It wasn’t long ago you could salary sacrifice much larger amounts into super each year. But now, with the annual concessional contribution limit set at $25,000 for all ages (including over-65s who meet the work test), thinking more strategically about how to build that retirement nest egg could be worthwhile.

For high income earners especially, the concessional contribution cap could be used up by compulsory employer contributions alone, leaving no room for additional salary sacrifice contributions. However, with up to $1.6 million allowed to be held in pension phase tax free at retirement, building wealth in super still has much to offer investors.

You should consider the following:

Prioritise concessional contributions

If you’re already maximising the concessional contribution limit, you’re on the right track, because it is one of the most tax-effective ways to save for retirement. If you’re left with surplus cash flow and wondering what else do with it – you may want to consider non-concessional contributions.

Making non-concessional contributions can make a big difference

While it is not the traditional approach, making non-concessional i.e. after-tax contributions using this surplus cash flow can help boost your final super balance.

For example, a 50-year-old today starting with a super balance of $300,000 could retire with $1,145,000 at age 65 by making non-concessional contributions of $1,000 per month on top of their maximum salary sacrifice. If you’re a little closer to retirement, you could still build a super balance of $815,000 in 10 years with the same level of contribution. The additional dollars in your pocket could mean an extra holiday every year in retirement!1

Considering the $1.6 million transfer balance cap

The overarching caveat is that you can only make non-concessional contributions if you have less than $1.6 million across all your super accounts.

Remember, your total super balance includes all super accounts including accumulation, pension, and defined benefit schemes.

Since the cap is measured at 30 June, with recent market falls, it may be possible that your total super balance at 30 June 2020 could be less than what was recorded at 30 June 2019.

If that is the case, it means as soon as the financial year starts on 1 July, you may have a fresh opportunity to make non-concessional contributions – pending age and other eligibility criteria. You may choose to contribute up to the annual limit of $100,000, or perhaps if you’ve sold an investment property or have personal savings build up, it may be worth activating the $300,000 ‘bring forward’ provision – available only if you’re under 65. 

Important to remember

Super is not accessible until you’re at least preservation age – for most pre-retirees that’s now 60 - so, consider how long your savings are locked up for and make sure you maintain a personal cash reserve to cover those unexpected expenses. For the amount you choose to put into super, invest it in a way that is aligned to your risk appetite – because it is for your retirement after all.

Tax rates within super are still very hard to beat for proactive savers. In Australia, super is still one of the most tax-effective vehicles to invest, so, start planning early if you want to get the most out of your savings.

Action points to consider now

Over the next few weeks before 30 June, keep an eye on how your total super balance is tracking. If your total super balance was previously above $1.6 million but ends the year below that amount due to recent falls in investment markets – consider whether you are eligible to make a non-concessional contribution.

If you were planning to make a non- concessional contribution, consider the timing in order to make sure you can get the maximum amount into your super by using the ‘bring forward’ provision.

If you need some guidance, there is still time to get advice from an expert financial adviser.

This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.

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Want to learn more about super?

Whether you’ve had the same super fund or investment structure in place for some time, your personal circumstances and balance may have changed – which is why it makes sense to review your arrangements. But where do you start? By using our simple guide, we show you five key areas you should consider when comparing options, which can help make it easier to make a more informed choice about your super and determine the most appropriate solution for you.

Download our guide to review and compare your super

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Ishara Rupasinghe

Executive Director

Ishara Rupasinghe has been with the firm since 2007 and is a director of the Family Wealth Management team in Canberra.

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