This question is one we frequently receive at LIFE Financial Planners. The motivation behind it often boils down to two key considerations: ensuring you have enough retirement savings and maximising potential tax benefits. Consulting with a superannuation planner at Life Financial Planners in Perth can provide clarity on this important decision.
Why Consider Topping Up Your Super?
The primary reason to consider topping up your superannuation is to ensure a comfortable and enjoyable retirement. Beyond that, there are significant tax advantages associated with the superannuation system. Here’s what you need to know:
Tax Benefits
Superannuation is an attractive option for accumulating retirement savings due to its tax benefits:
· Tax-Free Income in Retirement: Once you retire and convert your super savings into a regular income, this income is tax-free.
· Lower Tax Rates During Accumulation: Earnings within your super fund are taxed at 15% on income and 10% on capital gains, which is typically lower than personal tax rates.
· Tax-Free Payouts to Spouses: Superannuation is tax-free when paid out to a spouse upon your passing, unlike non-super investments that may incur capital gains tax.
The Drawback: Preservation
One key drawback is that superannuation savings are preserved until you reach at least 60 years of age and retire. This means any money you contribute to super is inaccessible until then. Therefore, it’s important to ensure that any top-up contributions are funds you won’t need until later in life.
Contribution Caps
When considering topping up your super, be aware of contribution caps, particularly the concessional contribution cap, which is currently $30,000 per year. Contributions above this limit may incur penalty taxes. Make sure to check how much of this cap is already being used by your employer’s contributions to determine how much more you can contribute.
Is Topping Up Right for You?
The decision to top up your super should consider your individual circumstances:
· Current Taxable Income: If your taxable income is under $45,000, the tax benefits of super contributions might be minimal.
· Alternative Uses of Funds: Consider whether these funds might be better used elsewhere, such as paying off a mortgage, which offers guaranteed returns equivalent to your mortgage interest rate.
· Future Top-Up Opportunities: You might also consider making larger lump-sum contributions later in life through non-concessional contributions or downsizing provisions.
How Much Do You Need?
To determine whether you should top up your super, start by estimating how much income you’ll need in retirement. Use tools like MoneySmart to estimate how much savings are necessary to generate that income. Then, compare this with your current super balance and projected future contributions to see if additional contributions are needed.
Get Advice From A Superannuation Planner in Perth
Australia’s superannuation system is complex, and it’s crucial to get advice tailored to your specific circumstances. If you’re unsure about whether to top up your super, reach out to one of our financial planners at LIFE Financial Planners in Perth. We can support you with tailored superannuation advice and develop a strategy that aligns with your retirement goals.
PHONE 08 9322 1882