One of the best ways to retire early is to max out your superannuation contributions. With the new reform dropping on the 1st of July 2021, you’ll have the chance to increase your super balance through greater contributions.
The reforms, which will increase the annual contribution caps by 10%, as well as boosting the Super Guarantee (SG) from 9.5% to 10%, come as a result of indexation (in line with the Australian economy and inflation). This increase can have significant positive effects on your superannuation in the long run.
Before we examine how the changes can benefit you, here’s a quick refresher about super for context.
What are superannuation contribution caps?
Superannuation, as you probably know, refers to the percentage of your wages that go directly into a retirement fund. The contribution caps refer to the maximum super contribution your employer (or you independently) can contribute to these funds every year.
These contributions can be either concessional or non-concessional:
Concessional contributions come from before-tax income. This includes contributions your employer makes automatically from your monthly wages, also known as Super Guarantee (SG), which has a 9.5% rate.
Non-concessional contributions are voluntary, coming from after-tax income. These are not taxable and have no percentage or rate to follow, but they do have limits.
How is super calculated?
The Australian Taxation Office (ATO) webpage explains how super contributions are calculated.
Your SG contribution is currently 9.5% of your ordinary times earnings (OTE) and is paid on top of your wages or salary by your employer.
Non-concessional contributions aren’t calculated this way; you can contribute more so long as your super balance remains under a certain threshold. Non-concessional contributions have a separate annual contribution cap, which is also set to increase. See below for more details.
What are the current super contribution caps?
The limits change depending on what type of contribution you’re making.
For regular concessional or before-tax contributions, the cap is currently $25,000. Contributors with less than $500,000 in super funds can add a few extra months of super. This is called the “carry forward” rule.
For non-concessional, voluntary, or after-tax personal contributions, the limit is $100,000. Members have a chance to add up to three times this contribution cap, using the “bring forward” rule. if you have less than $1.48 million in funds and are less than 65 years of age, you will be able to add up to $300,000 in additional contributions using the bring-forward rule.
ALSO READ: How Much Super Do You Need to Retire?
How will super contribution caps change this year?
Alongside other changes coming in 2021, like greater transparency, fewer super accounts, harsher consequences for underperforming super funds, you will find a slight increase in contribution caps. Here’s how they will work:
- Obligatory or concessional contributions from SG will increase to 10%. The standard rate was 9.5% of the salary. After July 1, it will be 10% for wages up to $275,000 per year.
That means employers will have to increase the amount of SG they pay their staff, adding a few extra hundred dollars per month to your super funds. The total cap is increasing from $25,000 to $27,500 per annum.
- For voluntary or after-tax personal contributions, the limit will be increasing by a full $10,000 to $110,000 of non-concessional contributions per annum.
This also means the bring-forward cap is set to increase from $300,000 to $330,000 from 1 July 2021. Finally, the maximum fund super balance before you’re unable to make additional contributions is increasing from $1.6 million to $1.7 million.
What does this mean for a super contributor?
It depends on whether you’re a wage earner or a voluntary contributor.
If you rely on employer contributions through SG, your super will increase by up to $2,500 per year. If you’re a voluntary or non-concessional super contributor, and make additional contributions on top of your SG, you can contribute an additional $10,000 to your super for a total of $110,000 per annum in non-concessional contributions.
Take note, if you regularly make use of the bring-forward rule, your caps may not increase immediately. Consult your financial advisor for more tailored advice.
In sum: These increased caps represent a small improvement for those who rely on employer CGs, and a significant one for people who make voluntary contributions – with the power of compound interest, an extra $10,000 per year can really add up to boost your retirement savings.
How to use the super contribution cap increase to my advantage?
Using these contribution caps to increase your superannuation savings is a powerful option for those who can afford it.
We recommend using the carry forward and bring forward rules to your advantage; maxing out your superannuation contributions can help you retire faster, and live more comfortably once you do. Also, extra funds in your super balance can allow for a more effective re-contribution strategy.
Still confused how this change could benefit you? That’s okay – we’re here to help.
With a proper financial plan in place, a healthy savings habit, and a cash flow system that works, we can help you develop an auto-pilot strategy to get your superannuation balance to a healthy position.
At Raeburn Advisors, we know the ins and outs of the superannuation system and have been helping everyday Australians maximise their savings for close to 15 years. Not only can we help you make the best decisions regarding your contributions, but we can guide you to make the most of what you’ve contributed already.
If you want to learn how to get the most from your super contributions, contact us now.This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.