Nearing retirement? Topping up your super is a smart way to get ahead

If you’re nearing retirement and have cash to spare, making additional contributions to your superannuation can be a smart way to get ahead.

“Topping up your own super is arguably one of the best ways to build wealth, because super is such a low-tax environment,” says Arash Zamansani, wealth advisory partner at William Buck.

“The flipside is that you’re locking up those savings, but if you’re only a few years out from retirement, that’s less of an issue.”

Here’s what you need to know about additional super contributions and the difference they can make to your retirement nest egg.

Salary sacrificing and concessional contributions

Salary sacrificing is when you ask your employer to deduct money from your base salary and pay it into your super account along with the 12 per cent super guarantee. Both salary sacrificing and the super guarantee are known as concessional (or before-tax) contributions.

Salary sacrificing is the most effective way to bolster your super balance, says Zamansani. “That’s because you only pay 15 per cent tax on the money going in, the same rate as your guarantee contributions.”

“Yes, you are effectively locking up this money, which can create anxiety, but the low-tax earnings, even a few years out from retirement, can be significant.”

Arash Zamansani, wealth advisory partner at William Buck.

There is a yearly limit of $32,500 on concessional contributions, which means if your employer makes $22,500 in super-guarantee payments, you can add $10,000 yourself.

Any investment earnings on salary-sacrifice amounts are taxed at a maximum rate of 15 per cent, not at your marginal tax rate.

Non-concessional contributions

You can also top up your super using your take-home pay or other earnings.

Because your marginal tax rate has already been applied to your take-home pay, no additional tax is payable when you transfer this money into super.

Like other types of super deposits, any interest earned on non-concessional contributions is taxed at 15 per cent. The annual non-concessional contribution limit is $130,000.

As a general rule, you should only consider non-concessional contributions after you have reached your concessional-contribution limit, says HLB Mann Judd wealth management partner Jonathan Philpot.

“Making sure you’ve taken advantage of the more generous tax rules for concessional contributions before moving on to non-concessional contributions is an easy win.”

However, if your financial situation is uncertain and you’d rather receive all your take-home pay initially, non-concessional contributions might make more sense for you.

The carry-forward rule

It may be possible to contribute more than $32,500 annually in concessional contributions if you didn’t reach the concessional-contribution cap in previous years.

Using the carry-forward rule, you can roll over unused portions of your concessional-contribution allowance from the previous five financial years.

To be eligible, you must be holding less than $500,000 in super on 30 June of the previous financial year.

“If you’re approaching retirement age and are earning more than you did previously, taking advantage of the carry-forward rule is one of the most meaningful ways to improve your position,” Philpot says.

You can also use the carry-forward rule if you stopped work entirely for part or all of the previous five years – for example, if you took parental leave.

Supporting your spouse

The maximum amount you can transfer from your super into a tax-free income stream at retirement is $2.1 million. For individuals who are nearing that cap, diverting money into their spouse’s super account makes good sense, according to Zamansani.

“We try to even up a couple’s super balances as much as possible, to maximise the benefits of super for the household collectively,” he says.

There are two main ways to do this:

• Contribution splitting allows you to transfer up to 85 per cent of your own concessional contributions from the previous financial year into your partner’s super account without paying additional tax, although not all super funds offer this;
• You can also make non-concessional contributions into your spouse’s super account in the same way as you would your own, with no additional tax payable.

Freedom on the horizon

Zamansani concedes that voluntarily making superannuation contributions may make some pre-retirees nervous, but he says his clients who do so rarely regret it.

“Yes, you are effectively locking up this money, which can create anxiety, but the low-tax earnings, even a few years out from retirement, can be significant.”

He points out that retirees can draw larger amounts from their super than the standard 5 per cent per year, so additional contributions can be retrieved promptly if unexpected expenses arise.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their personal circumstances before making any financial decisions.

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