Should you top up your nest egg?

Although the relevant legislation is yet to be passed by the Senate, it's likely super fund members will be able to contribute up to $180,000 (age 65 to 74) or $540,000 (under 65) this financial year as non-concessional contributions.

For those with more than $1.6 million in super already, it's the last opportunity to boost their superannuation account by making personal non-tax-deductible contributions.

For those with lower account balances, there'll still be further opportunities to contribute up to $100,000 (64 to 74) or up to $300,000 (under 65) after July 1, 2017, when the new rules apply.

The incentive to make a large additional contribution this year is thus greatest for those with larger account balances or already in retirement or soon to retire. For younger and middle aged people, making large super contributions is less attractive because, since 1999, all new contributions are untouchable until age 60.

Even for those where gaining access is not an issue, funding a large contribution can be a problem especially when it involves the sale of assets or borrowing against those assets.

Selling existing assets triggers any attached capital gains tax liability as well as the risks of achieving comparable after-tax rates of return in the super fund.

In today's low interest rate environment, the interest costs of borrowing aren't high but the taxation rules don't allow a tax deduction for interest payments incurred. Borrowing is thus likely to be a viable option only when the loan can be repaid quickly.

The biggest incentive to make a large super contribution this year is that from July 1, 2017, those with existing balances of $1.6 million or more won't be eligible to make further non-concessional contributions to their fund.

This $1.6 million cap will include the notional lump sum value of defined benefit pensions received by the super fund members. This gives defined benefit pension recipients a special reason to investigate the benefits of making a large additional lump sum contribution this tax year while they still can.

In evaluating the merits of adding to superannuation balances by making voluntary contributions, the key consideration is the taxation savings. Given that comparable pre-tax investment returns are available from investments inside and outside super, moving money into super makes sense only if the tax burden on personal investments exceeds that in the super fund.

In pension phase, superannuation provides tax-free income after age 60 while in accumulation funds, the maximum income tax rate is 15 per cent with tax-free withdrawals after age 60. In practical terms this means that higher income retirees are most likely to benefit from what for a considerable number will be their last chance to move a large amount into their super fund.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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