This month Financial Adviser and Mortgage Broker, ROD LINGARD delves into the topic of Superannuation and provides clarity how it works and the taxation benefits if offers you.
Superannuation, or Super. Most of us have it, or have heard of it, but how does it work and what is it really all about?
Super is all about saving for retirement. In fact, super’s sole purpose is to provide for retirement. The quality of life we have in retirement is linked directly to the money we have saved or invested.
It’s fair to say the more we have saved, the more things we can do in retirement. Yet I still see many people undervalue their super.
Why is having Super so important?
One of the key reasons Super is so important is the ability to make ‘concessional contributions’.
In layperson’s terms this means you get a ‘tax deduction’ for your contributions – there is a limit – more on that later. But what does this mean in the real world?
Let’s say you had a goal of saving $100 per week, and you earn somewhere between $45,001 and $120,000 per annum. If your gross income is in this range, you have a Marginal Tax Rate (MTR) of 32.5% + 2% Medicare Levy.
If you want to save that $100 in a bank account, it’s pretty simple. You deposit $100 into a savings account and have $100 less per week to spend!
By using a tax deductible contribution into Super, you can effectively boost the amount being saved.
Using our example, if you are happy to have $100 less to spend each week, you could be better off putting it into Super.
If you contribute the money into Super rather than the bank, you would end up with $129.77 in Super for the same cost.
That’s right, for the same out of pocket cost, you can either save $100 after tax OR you could contribute $129.77 to Super.
Understanding this principal could have a significant and positive effect on your retirement savings.
How much can be contributed to Super each year?
I mentioned earlier there are some limits on how much can be contributed in pre-tax dollars.
Regardless of your age, that figure is $25,000 per annum. The $25,000 includes any amounts that your employer pays under their Superannuation Guarantee obligation.
There is some good news however. There are now some ‘catch up’ or ‘carry forward’ provisions in place.
Carry-forward contributions allow super fund members to use any of their unused concessional contributions cap (or limit) on a rolling basis for five years.
So, what does that actually mean?
Let’s say you didn’t contribute the maximum for the financial year ended 2019, but you now have some spare cash. You have until the end of Jun 2024 to make extra deductible contributions, up to the $25,000 limit.
This all sounds fantastic, so what is the downside?
For most people, the biggest downside is the fact that, for the most part, once a Super contribution is made, the money is becomes subject to what are known as the preservation rules.
In plain language this means that the money has to stay in superannuation until you retire or reach a certain age. In most circumstances it can’t be accessed for a rainy day.
But if you are genuinely saving for retirement, pre-tax contributions are a great way to save or invest.
Whether retirement is on the horizon, or you just want to start boosting your retirement savings right now, it might be time to check out Super.
Rod Lingard is a Licensed Financial Adviser with Lifestyle Connexion and can be contacted on 0400 160 461. Financial Advice is provided by Rod Lingard – Authorised Representative No: 248734 of MASU Financial Management Pty Ltd | AFS Licence Number 231140 ABN: 78 069 358 498.
General Advice Warning: This blog is not designed to replace professional advice. It has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the advice, in light of your own objectives, financial situation or needs before making any decision as to what is appropriate for you.