It's a question that I'm often asked off the cuff by younger people, "Should I be contributing extra to superannuation?"
The question comes about because they want to set themselves up for retirement and they know starting early is the key to that. There is basically one major pro and one major con - the pro is tax savings and the con is that it is locked up for a long time. That con however could also be seen as a pro, as it can be a method of 'forced savings' similar to a mortgage.
There is never an answer that fits everyone, hence this being just general advice, but lets have a look at it to help you make the decision.
There is 2 types of contributions you can make:
Non concessional - a contribution to superannuation using after tax money. ie. money you have already paid income tax on and is in your bank account. A non concessional contribution incurs no contribution tax on entry to superannuation as you've already paid income tax on it.
Concessional - this refers to contributions your employer makes as well as salary sacrifice contributions or a contribution that a self employed person makes which they claim a tax deduction for. It is essentially contributions made using pre tax money. Money in which income tax hasn't been paid yet. Concessional contributions incur 15% tax on entry to superannuation.
For most people under 40, they probably shouldn't be making any non concessional contributions, unless they are a low income earner and can access the government co contribution. In which case, they should only be making up to $1,000. For details on the thresholds for this, you can visit the ATO Website here. For some lucky few who have managed to accumulate significant wealth prior to the age of 40, they may start looking to make some larger non concessional contributions but this would definitely be in very rare circumstances.
For someone making extra concessional contribution (above the employer contributions), such as requesting your employer to salary sacrifice contributions, the benefit may just be worthwhile. The tax savings on salary sacrificing to superannuation depends on your marginal tax rate. If you are on the top marginal tax rate (and earning less than $300,000), you will save 34% in tax after taking into account the 15% tax on superannuation. It essentially means that by giving up $1 of after tax income (money in the bank) you would have $1.67 in superannuation. 67% more money just by having it in superannuation and if you are on the top marginal tax rate, you probably have reasonable cash flow to afford to give up a few $.
As you earn less, the savings become less, and the less likely that you have surplus cash flow lying around but that definitely doesn't mean people on lower marginal tax rates shouldn't salary sacrifice.
Looking at the maths, however, doesn't really answer the questions - there is other factors at play. For anyone under the age of 40, their preservation age currently 60, and we'd probably be kidding ourselves if we didn't think it will be more like 65 by the time we get there. So, what do you do?
Well, as I said earlier, there is no right or wrong answer but what I will say is that I talk to people all the time about their finances, it's what I do, and I'm yet to meet a person that has said "I really regret putting away that extra money into superannuation" but I do meet people all the time who aren't adequately prepared financially for retirement and I also meet plenty of younger people (myself included) that spends money on things that they could probably do without.
For most people (earning between $37,000 and $80,000) they are on the 34.5% marginal tax rate. Why don't you think about requesting salary sacrificing say $50/week. It'll mean you'll have $32.75/week less in you bank account. Maybe increase it over time? Your future self will thank you for it.
Note: it is important to remain under your concessional contribution cap of $30,000 per annum for those under the age of 50. This includes what you employer contributes for you. This is general advice only and does not take into account your personal circumstances. We recommend you seek professional personal advice.
Author: Glenn Hilber is the Senior Financial Adviser for Precision Wealth Management. He can be contacted on 1300 200 012 or enquiries@precisionwm.com.au
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