A recent study by ASFA1 shows that Australians face a major income shortfall in retirement if they depend on their employer's super contributions alone.
For retirees aged 65 to 85, a single person needs around $831 and a couple $1,143 a week for a comfortable retirement. For retirees aged over 85, a single person needs around $751 and a couple $1,053 a week for a comfortable retirement.
According to ASFA, your current employer super contributions afford you a rather modest lifestyle in retirement. For retirees aged 65 to 85, a modest lifestyle allows a budget of only $460 a week for a single person and $662 a week for a couple. For retirees aged over 85, the weekly budget for a modest lifestyle is $452 for singles and $670 for couples.
By adding extra to your super now, you can close the gap in your retirement savings and enjoy a more comfortable retirement. A comfortable retirement means being able to afford private health insurance, internet at home, running your car and a few luxuries like dining out. A modest retirement would mean having to reduce your current standard of living.
You can make extra contributions to your super any time at no cost, and they will be added to your existing super account.
Making extra contributions from your before-tax income is known as salary sacrificing. The money you 'sacrifice' is paid directly from your salary into your super account before you pay income tax.
In addition to growing your super, salary sacrificing reduces your taxable income and therefore reduces the amount of income tax you pay.
You can easily start, stop or change the amount you salary sacrifice as your situation changes. To start salary sacrificing you will need to check that your workplace has a salary sacrifice arrangement in place, complete the Payroll deduction form and return it to your employer. Alternatively, you can salary sacrifice through a salary sacrifice packaging provider.
Depending on what type of GESB account you have, different rules apply:
GESB Super: contributions are taxed at 15%2. This means that you have more money to invest compared with investing after-tax, as your income may be taxed up to 49% (depending on your marginal tax rate). Limits apply to how much you can contribute to your GESB Super each year before you are subject to higher tax - see contribution limits below. For more information refer to the GESB Super salary sacrifice fact sheet.
West State Super: contributions to West State Super are untaxed; however, tax is paid when you access your benefit. There are no limits on salary sacrifice contributions to West State Super but there is a lifetime untaxed plan cap of $1.415 million3 which limits the untaxed benefit that can be paid or rolled over to a taxed fund and still receive concessional tax treatment. For more information refer to the West State Super salary sacrifice fact sheet.
2 The concessional tax treatment of certain super contributions has been reduced for very high income individuals. An individual's income is added to certain super contributions (referred to as low-tax contributions) and compared to the high income threshold of $300,000. Tax is payable on any excess low-tax contributions if the combination of income and low-tax contributions exceeds the $300,000 threshold. There are special rules for defined benefit interests, constitutionally protected state higher level office holders, certain Commonwealth justices and temporary residents who depart Australia. For more information, read the Tax and super brochure or visit the ATO website. 3 For the 2016/17 financial year, indexed annually for future years. The untaxed plan cap applies per fund, not per person.
After-tax (non-concessional) contributions
You can make extra contributions using your after-tax income. There are several ways to make an after-tax contribution:
There are limits that apply to contributions. They vary depending on what type of account you have:
GESB Super: limits apply to both concessional and non-concessional contributions.
West State Super and Gold State Super: concessional contributions are not limited, but are affected by the lifetime untaxed plan cap of $1.415 million4. If this cap is exceeded, any amounts over the cap (including concessional contributions) will be taxed at a higher rate. Limits do apply to non-concessional contributions - see table below.
Type of contribution
Cap for 2016/17
Concessional (before-tax) GESB Super accounts only
$30,000 p.a.5 or if aged 49 years or over on 30 June 2015, then your cap is $35,000 p.a.6
Taxed at 32%8
If you were aged 49 years or over on 30 June 2016 then a temporary higher concessional contributions cap of $35,000 is available for the 2016/17 financial year. For all other individuals, the cap is $30,000.
Non-concessional (after-tax) Gold State Super, West State Super and GESB Super accounts
Taxed at 49%8
People aged under 65 can bring forward the next two years of contributions (i.e. up to $540,000)
4 For the 2016/17 financial year, indexed annually for future years. The untaxed plan cap applies per fund, not per person. 5 For the 2016/17 financial year. The concessional contributions cap is indexed in line with Average Weekly Ordinary Time Earnings in increments of $5,000 rounded down. 6 If you were aged 49 years or over on 30 June 2016 then a temporary higher concessional contributions cap of $35,000 is available for the 2016/17 financial year. This temporary higher cap is not indexed and will cease when the general concessional contributions cap is indexed to $35,000. 7 For the 2016/17 financial year. This cap is equal to six times the general concessional contributions cap. 8 Including 2% Medicare Levy.
Spouse contributions allow you to contribute money to your spouse's super account. These contributions assist in growing your joint retirement savings and you may receive tax benefits. If your spouse has an annual income of less than $10,800, the first $3,000 of spouse contributions entitles you to an 18% tax rebate (up to a maximum of $540 per year). Your spouse can earn up to $13,800 per year for you to receive a partial rebate. For more information, refer to the Spouse contributions brochure.