Your superannuation fund is a defined accumulation scheme where a portion of your salary is compulsorily deposited into an account and invested for the sole purpose of your retirement. Making extra contributions to your superannuation account is beneficial as time invested ‘in the market’ will create a large sum of capital available for retirement while also reducing your taxable income in the current financial year.
Financial Snapshot
Gerrard (30) is working as an Engineer in Melbourne and is starting to take an interest in his superannuation account. He currently has 3 superannuation accounts from various jobs and looking to amalgamate his investments into one will exploring ways to reduce his taxable income.
| Income | Assets | Super Contributions |
| Gerrard Salary: $120,000 | Cash Savings: $50,000 | FY 2024/25: SG = $13,800 |
| Estimated Tax Payable: $29,188 | Super A: $5,000 | |
| Expenses: $60,000 | Super B: $15,000 | |
| Saving: $25,000 | Super C: $20,000 |
Understanding Gerrard’s Financial Needs
Gerrard wanted to simplify his superannuation accounts as he noticed that he was paying for insurances inside all of his accounts and that there were layers of additional fees for every superannuation account. He was also motivated to make proactive steps to his retirement in the present as he understood by making additional contributions to his superannuation account, these funds would be compounded over the course of his working lifetime for his retirement.
Financial Objectives
To amalgamate his superannuation accounts and invest for a retirement of 65 on an income of $70,000 per annum.
Strategy Consideration: The Concessional Contributions Cap
- The Concessional Contribution cap is the annual limit on pre-tax contributions to superannuation, including employer contributions, salary sacrifice, and personal deductible contributions, currently set at $30,000 in Australia for the 2024-25 financial year. All contributions are taxed at 15% upon entry.
- Superannuation Guarantee Contributions are mandatory payments made by employers into their employees’ superannuation accounts, calculated as a percentage of the employees’ ordinary time earnings, currently set at 11.50 % in Australia for the 2024-25 financial year
- Personal deductible contributions are voluntary contributions made to your superannuation from your after-tax income, which you can claim as a tax deduction to reduce your taxable income.
- Salary sacrifice is an arrangement between an employee and their employer where the employee agrees to forego a portion of their pre-tax salary in exchange for certain benefits provided by the employer.
Understanding The Benefits & Trade Offs
Superannuation contributions and earnings are taxed at 15% which can provide financial advantages by making additional contributions to a superannuation account. Once funds are contributed to superannuation funds are ‘preserved’ for an individual’s retirement benefit and remained invested for the long term.
Outcomes
There are several factors to consider with such a strategy, including:
- Gerrard decided to contribute an extra $6,200 per annum ($120/w) as a salary sacrifice. This reduced his personal tax liability to $27,204. He had to pay $930 inside his superannuation account, which overall saved him $1,054 in total tax for the financial year.
- The table below shows the before and after outcomes of making extra contributions to his superannuation account over time. The assumed real rate of return of 5.2% and accounted for tax paid to the fund.
| Year | Before | Yearly Contributions | After | Yearly Contributions |
| 1 | $40,000 | $13,800 | $40,000 | $20,000 |
| 2 | $53,810 | $59,080 | ||
| 3 | $68,338 | $79,152 | ||
| 4 | $83,622 | $100,268 | ||
| 5 | $99,700 | $122,482 | ||
| 10 | $193,537 | $252,128 | ||
| 20 | $470,231 | $634,410 | ||
| 30 | $929,595 | $1,279,072 | ||
| 35 | $1,262,843 | $1,729,489 |
Further Considerations
As part of the advice provide to Gerrard he also considered the other areas of financial advice which were:
- Personal Insurances: Life, Total Permanent Disablement Insurance, Income Protection & Critical Illness. When superannuation funds are amalgamated and closed, the individual will lose their personal insurances.
Learning More
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