Should I use my savings to top up my super?

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Your employer already contributes to your super account, so should you be topping that up?

Let’s begin by ensuring you know why Australia’s superannuation system is attractive for your retirement savings. Throughout your working life you accumulate superannuation savings. At some point beyond the age of 60, you retire and convert those superannuation savings into a regular income. That income is paid out to you tax-free.

Topping up your super can be beneficial, but it’s important to ascertain if it makes financial sense.Credit: Simon Letch

Whilst you are working, taxes on the earnings within your super fund are 15 per cent on income and 10 per cent on capital gains. For most people, this will be considerably less than were you to hold equivalent investments outside superannuation in your name.

These tax incentives mean that superannuation is very attractive for accumulating wealth. But there’s no such thing as a free lunch. Superannuation does have one drawback, and that is something called “preservation”.

Your superannuation savings are preserved – inaccessible – until you are at least 60 years of age and retired. This means that money you put into super must be money you are confident won’t be required until later in life.

Our superannuation system is complex, and I can’t go through all the fine detail in this article. But one key element to be aware of when considering the question of topping up your super is contribution caps. The current concessional contribution cap is $27,500 per year. Contributions made exceeding this limit can have penalty taxes applied.

Your employer will automatically contribute 10.5 per cent of your wage into superannuation. When contemplating making top-up super contributions, ascertain how much of your contribution cap is already being used up through your employers’ contributions.

How much headroom do you have within the cap? If you’re a high-income earner, it may be that you have no room within your cap, so making top-up super contributions is a moot point.

Assuming you can make super contributions, the next consideration is what alternative uses those funds could be put to.

Top-up super contributions produce tax benefits but at the expense of losing access to your money for many years. If you have a mortgage, it might be preferable to focus any savings capacity towards paying off your loan. Whilst there is no immediate tax benefit, taking this approach guarantees an effective return of whatever your mortgage rate is, at present likely somewhere around 6 per cent.

Finally, when trying to decide whether you should be topping up your super, it’s worth reflecting on how much superannuation savings you actually need.

Start by estimating how much retirement income you require. From here you can play with the calculators online at MoneySmart and get a rough estimate of how much retirement savings you would need to produce your target level of income.

Armed with this target figure, crunch the numbers on where you would expect your superannuation to be at retirement, given its current balance and expected future employer contributions. You might find that you are already on track to have all the superannuation savings that you need, in which case sacrificing now to contribute more to super might be a wasted opportunity.

It would be pretty disappointing to have far more money than you need when you’re 95 years old and in poor health because you made sacrifices in your 30s or 40s when you were fit and well and could have been out having fun.

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

Paul Benson is a Certified Financial Planner, and the host of the Financial Autonomy podcast.

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