We often get asked, “Should I be topping up my super?” It’s a common question among many of our clients here in Perth, particularly as they begin to plan for a comfortable retirement. The primary motivation behind this question is ensuring you’re on track to build enough retirement savings for the kind of life you want to enjoy later on. But there’s also the tax angle to consider—superannuation has several attractive tax benefits that you don’t want to miss out on.
So, how do you know if it’s the right time to top up your super? And more importantly, is it the right decision for you?
Before we dive in, let’s take a moment to remind you that this information is general in nature and doesn’t account for your specific circumstances. Superannuation can be complex, and the rules are ever-evolving, so it’s always a good idea to seek personalised advice from our team at LIFE Financial Planners, where we tailor every recommendation to your unique financial situation and goals.
Why is Super So Attractive?
Let’s start by making sure you understand why Australia’s superannuation system is such an appealing vehicle for retirement savings.
The ultimate benefit of super is that once you reach retirement age—currently 67 years old—you can access your super income tax-free. That means every dollar you withdraw from your super in retirement is yours to spend, without the tax ‘leakage’ you experience on your regular salary. For example, if you’re currently earning $120,000 a year, after tax, you’ll have around $88,000 to spend. But in retirement, if you want that same $88,000, you only need to withdraw that amount—tax-free—from your super. This means the amount of wealth you need to accumulate for a comfortable retirement is significantly lower within the super system than it would be if you were relying solely on non-super investments.
But that’s not the only tax benefit. During your working life, any earnings in your super fund are taxed at just 15% on income and 10% on capital gains—often much lower than the rates you’d pay if you held these investments in your name.
And let’s not forget, that superannuation is also tax-free when passed on to a spouse after you pass away, which can make it a very effective estate planning tool.
So, Should You Be Topping Up Your Super?
The Drawback: Preservation
Of course, no system is perfect, and superannuation has its limitations. The main drawback is something called “preservation”—your super savings are inaccessible until you’re at least 55-60 and retired. This means the money you contribute to super should be funds you’re confident you won’t need until later in life. It’s vital to weigh this against other financial priorities, like your mortgage or more immediate financial goals.
Contribution Caps
Another important factor to consider when topping up your super is contribution caps, particularly concessional contribution caps. These are limits on how much you can contribute to your super and still claim a tax deduction. The current concessional contribution cap is $30,000 per year, which includes the compulsory 11.5% employer super contributions.
If you’re thinking of topping up your super, your first step should be to check how much of your contribution cap is already being used by your employer’s contributions and how much “headroom” you have left within the cap.
How Does Tax Come Into Play?
While super’s tax advantages are attractive, they may not always benefit everyone equally. For instance, if your taxable income is under $45,000, you may not gain much from making top-up concessional contributions. The preservation of your money could outweigh any potential tax savings. In some cases, it may even be more beneficial to retain these funds in your own name or to explore after-tax contributions as retirement approaches.
What Are Your Alternatives?
Here in Perth, where we see a range of property market fluctuations and living expenses rising with our growing city, it’s essential to think about how best to allocate your funds. One common alternative to topping up super is focusing on paying off your mortgage. While this approach doesn’t offer immediate tax savings, it provides guaranteed returns—whatever your mortgage rate is, typically around 6% right now. Paying down your home loan early can save significant interest over time and free up more disposable income for later.
For those planning to retire early, investing outside of super can offer greater flexibility. Since super is locked away until at least age 60, putting savings into personal investments can give you access to those funds sooner if needed.
Topping Up Later in Life
It’s also worth considering that you can make larger lump-sum contributions to super later in life. The non-concessional contribution cap currently sits at $120,000 per year, and there are even provisions for larger downsizer contributions if you sell your home in retirement.
This flexibility allows you to focus on other financial priorities earlier in life—like paying off your mortgage—before turning your attention to super in the lead-up to retirement. This might be the best approach for many Perth families who are juggling multiple financial goals.
How Much Super Do You Actually Need?
Ultimately, the question of topping up your super depends on how much you’ll need in retirement. It’s a good idea to start by estimating your desired retirement income and then use calculators like those on MoneySmart to figure out how much super you’ll need to generate that income. Once you have a target in mind, look at your current super balance and projected employer contributions to see if you’re on track.
If you’re not sure where you stand, we’re here to help. At LIFE Financial Planners, we specialise in helping clients like you plan for a financially secure retirement—tailored to your needs and the unique financial landscape here in Perth. We’ll provide you with personalised advice, and the support you need to make informed decisions about whether topping up your super is the right move.
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