Personal Contribution to Superannuation Plan

Question

I am from Australia and have a question regarding retirement planning. I am trying to make a decision if I should start making after tax contributions to my Super to match my employer contribution.

I have 32 years till I reach retirement which is 67 years here. My contribution to the Super will be 650 AUD per month.
I have negligible retirement savings. My income is 80000 AUD before tax and super.

I used the retirement calculator here. Following are the snapshots of my retirement income without and with personal contributions.

Without any 'after tax' personal contribution

With 'after tax' personal contribution equal to my employers contribution

Taking into consideration that personal contributions to Super actually reduces the pension that I am eligible after retirement does it make sense for me to make the extra payment to super from my after tax income ?

Am I better off diverting this money to say my savings to buy a house ?

Answer 1

Just to clear a few things up first, if you are going to be a self funded retiree you can retire from age 60 and have up to $1.6M in a super pension fund earning you tax free income. If you want to get an Age Pension from the government then you will have to wait until age 67 (however this may rise further by the time you reach that age due to people living longer).

The second thing to clear up is that for any personal super contributions you make up to the concessional cap of $25K you can claim a tax deduction for. The 25K includes the total of your employer SG contributions and your personal contribution. If you make non-concessional contributions (after tax contributions) you have a yearly cap of $100K.

With your employer's SG contribution being 9.5% x $80K = $7600 and you looking to contribute $650 x 12 = $7800, you would be well below the $25K yearly cap.

So if you claim a deduction for this $7800 you will reduce your annual tax by $2535. You will however, have to pay 15% contribution tax inside your super fund for this $7800, being $1170. So your annual net tax savings will be $1365.

But as you start earning more and your income rises above $87K, your net tax savings will increase to $1716 for the same $7800 contribution.

If you increase this contribution as your pay increases, then your tax savings will be even higher.

So the benefits of super:

• tax advantage when going in - contributions and earnings only taxed at a maximum of 15%.
• claiming a deduction for any personal contributions to super is one of the best ways to reduce how much personal tax you pay each year.
• zero tax in retirement - up to $1.6M in a super pension fund, any earnings are tax free and any income you take out is tax free.

Conclusion, you are 35 and you might want to save to buy a house now, but you should also try to make some contributions to super if you can. You can claim a deduction for it and reduce your taxes. As you get a little bit older (say in the next 10 years) and your income grows, it will become even more important and beneficial to make concessional contributions to your super so you can grow your pot, pay less tax (now and in retirement) and have a more comfortable retirement. Remember, in 30 years time it is likely that further changes are made to the Age Pension, the age might rise further, the requirements to get it might become harder, so you shouldn't be planning on getting any Age Pension, but if you do, see it as just a little bonus on top.

Answer 2

For the difference of $8000/year, I would probably find a better use for the money. Where I live, I could buy an annuity that would make up the difference for a little over $100K.

With your added numbers, a $650 monthly deposit in your savings account would net you a lump sum of $750K if you assume a 6% rate of return. Even with a 0% rate of return, you're making $250K of deposits over the next 32 years.

A house would reduce your expenses instead of increasing your income, so it would probably be a tax efficient way to boost your standard of living in retirement more with that money than you would through the Super or through other savings.