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We all know it’s something we should be doing but putting away a little extra for tomorrow is something that is easily put off as we focus on our daily lives.

Members often tell us that they know they should have started making extra contributions to their super some time ago, but it all just seemed too hard.

And they’re half right – like all things in super the earlier the better, though it’s never too late to start.

However it’s not hard to take action. Making extra contributions is as simple as arranging a payroll deduction with your employer or setting up a BPAY® payment with your online banking using Mercy Super’s BPAY Biller Code 344440 and your unique Customer Reference Number that you can find through Member Online or by contacting us.

Let’s start by removing any confusion around making extra contribution to your super.

There are two ways of making contributions to your super:

  1. Before-tax (known as concessional contributions). These are contributions made from your before-tax salary (no surprise there) and include contributions made on your behalf by your employer, salary-sacrifice contributions that you ask your employer to pay from your before-tax income and any other contributions that you claim a tax deduction on (more on that later).
  2. After-tax (known as non-concessional contributions). These are contributions you make from anywhere else, such as direct lump sum payments and BPAY deductions you set up with your bank account. They come from money that has already had any applicable tax applied.

Because there is no income tax paid on Before-tax contributions before they reach your super account, they are taxed at 15%* when they go into your account. For most people this is much lower than their marginal tax rate making this sort of contribution very tax effective. However, to ensure people don’t make too much of a good thing, there is a $27,500 annual limit for after-tax contributions which includes the contributions your employer is paying on your behalf.

As After-tax contributions are sourced from monies that have already been taxed there is no additional tax applied to these contribution when they reach your account. There are also much more generous limits for these contributions of $110,000 per year.

Tax deduction for After-tax contributions

If you’re making After-tax contributions you can, if you are eligible, claim them as a tax deduction as well which turns them into Before-tax contributions (the same as salary sacrifice). They are then subject to the same tax treatment and limits. However there some steps you need to follow before you lodge your tax return if you want to claim these contributions as a tax deduction – you can find out more here. This reduces your taxable income and the amount of tax you need to pay.

How much extra should I put away?

That depends on what you can realistically afford – what can you go without today to put towards the retirement lifestyle you’re looking forward to tomorrow? But it doesn’t have to be a huge sacrifice – extra contributions no matter how small can make a big difference to your retirement.

Some rules of thumb that seem to work for members we talk to are:

  • Consider offsetting the cost of your insurance premiums that are deducted from your super account. Let’s face it, if you had the cover provided outside your super you’d be paying the premiums directly from your take home pay.
  • The price of a cup of coffee a day – diverting it to salary sacrifice can add an extra $1,500+ to your super each year.
  • 5% of your salary – close to half what your employer is paying. This seems to be a magic number that members can have deducted from their pay without much pain.
  • A portion of your next pay increase.
  • Whatever works for you – $10, $20, $50 a week or fortnight?

The key is to do something – make a start as soon as you can so the magic of compounding returns can start working for you. You can always start with something small and see how it works – we can help you work out if it’s enough to get to the retirement lifestyle you’re wanting.

What a big difference a little sacrifice can make1

It doesn’t take much to make a big difference to your future and offset the impact of any career breaks.

Emma, Michelle and Sarah are aged 30, on a salary of $80,000 p.a. with a $50,000 super account balance. Michelle and Sarah each take three 12 month career breaks. Sarah decides to add an extra $1,500 p.a. to her super – by salary sacrificing, her take annual take-home pay is reduced by just $983 (or $2.70 per day).

 

Emma

No career breaks or extra contributions

 

 

Last to age 103

3% chance of outliving super

Michelle

Three career breaks and no extra contributions

 

 

Last to age 100

11% chance of outliving super

Sarah

Three career breaks & $1,500 p.a. salary sacrifice contributions

 

 

Last to age 104

2% chance of outliving super

 

As you can see, Sarah retires with $77,000 more than Michelle who had three career breaks and $18,000 more than Emma who had no career breaks!

Is that all there is to it?

Pretty much – but there are also some special circumstances around the contribution caps that allow you to utilise “unused” portions from past years, additional co-contributions the Government will put in for you if you’re on a low income and even incentives for spouse contributions for some people.

And if you’re over age 60 you are uniquely positioned to use what is called a Transition to Retirement strategy. This is where tax-free payments from your super can offset the impact of additional salary-sacrifice contributions. This has the potential to increase the net amount going to your super without any loss of take home pay – just by paying less tax.

Mercy Super Member

Don’t put it off again

The key takeaway is that it’s not hard to get started and doing something now provides a much better outcome than doing nothing or pushing it down the track.

The Mercy Super team is here to help you get the best possible outcome for your super. That’s the only reason we exist – so let’s get started on looking for smart ways to give your super a boost and set up a strategy that’s right for you. All you need to do is get in touch.

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® Registered to BPAY Pty Ltd ABN 69 079 137 518

* If your taxable income is less than $250,000 per year, your super contributions are taxed at 15%. If you’re a high income earner (adjustable taxable income including salary sacrifice superannuation contributions more than $250,000 per year), you’ll pay 30% tax on super contributions.

The information provided is of a general nature only and does not take into account your individual financial situation, objectives or needs. Accordingly, before acting on the information, it is important that you consider the appropriate Product Disclosure Statement, available from mercysuper.com.au or by contacting us, having regard to your own particular situation.

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