Paul's Insights: Playing catch-up with your super
For much of our working lives, retirement seems a long way off. But in the blink of an eye we can find ourselves in our mid-50s with insufficient super for our ideal retirement lifestyle.
The solution can be catch-up super contributions.
By way of background, ‘concessional’, super contributions are limited to $25,000 annually. This includes your employer’s compulsory super contributions typically set at 9.5% of your gross salary.
For many workers, the bosses’ super contributions will come in below the $25,000 yearly limit. When that happens, you may be able to claim a tax break by contributing the difference to super out of your own pocket.
As a guide, let’s say Nicky’s employer contributes $10,000 to her super this financial year. That means she can potentially claim a tax deduction for up to $15,000 ($25,000 less $10,000) that she adds to super from her own money.
It can be a great way to grow your super while saving on tax today. But to really fast-track your super balance, carry-forward contributions can come in handy. These let you make use of any unused concessional super contributions from previous years as long as you have less than $500,000 in super at the start of each financial year.
We’ll say for instance that last financial year, Bill’s boss contributed $15,000 to Bill’s super fund – that’s $10,000 less than the annual limit. Bill was strapped for cash and so didn’t add any extra to his super. But he can carry forward that unused $10,000 to the current financial year.
If Bill’s employer once again contributes $15,000 to Bill’s super in 2020/21, Bill can potentially make a concessional super contribution of $20,000 this financial year – comprised of a carry-forward contribution of $10,000 from last year, plus $10,000 from 2020/21.
Sure, not everyone has that sort of money sitting around. But if you’ve sold an investment property for a capital gain, or you’ve earned a decent work bonus or received an inheritance, it is worth thinking about making catch-up super contributions, especially if you’re in the pre-retirement period.
You are able to carry forward unused concessional contributions from 1 July 2018, so you could have several years’ worth of these contributions to call on – but they can only be carried forward for a maximum of five years. This makes it worth talking to your tax adviser to see if carry-forward contributions could be the solution that lets you play catch-up with your retirement savings.
Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.