Topping up your superannuation with voluntary contributions is a nicety for high income earners but the average Australian is unlikely to have the spare cash to do it.
As the nation’s past and present political leaders debate whether a scheduled 2.5 per cent increase to compulsory employer super contributions should proceed in light of the COVID-19 induced recession, what’s apparent is that the average Australian woman is unlikely to be able to afford to top up their superannuation savings themselves.
According to financial experts, the ability of individuals to make extra voluntary contributions to their super such as through salary sacrifice arrangements, depends on your age, personal situation and most importantly, your income.
“There is no real tax benefit to people putting money into super if they are earning under $37,000 a year as this is the end of the 19 per cent personal tax bracket and given super contributions are taxed at 15 per cent, it is only a small tax benefit,” says Jonathan Philpot Wealth Management partner at HLB Mann Judd.
“However if your taxable income is above $90,000 a year, that is the income threshold where it becomes beneficial to top up super as your personal tax rate is now 37 per cent, plus 2 per cent Medicare levy.
“A $10,000 super contribution would provide someone with a personal tax deduction benefit of $3,900 and the super fund would pay $1,500 tax on the $10,000 contribution.
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"If people have large amounts of credit card debt and loans, then they need to repay these loans first of all.
"Then if they have a home loan, the rough rule of thumb is that once the home loan value is less than 50 per cent of the property value, then at that point consider putting extra amounts into super,” says Mr Philpot.
As it stands the average Australian full-time working woman earns about $81,000 a year, compared to $94,000 for the equivalent man, according to Australian Bureau of Statistics figures. The average full-time Australian worker earns $89,000.
“Generally speaking most people are on average wages,” says Sofcorp Financial Services partner Tracey Sofra.
“In my experience the people that top up their super are people on higher incomes on over $150,000 or business owners. Some sectors do get incentives to top up their super which can make it a big deal.
“When you are an accumulator [in the accumulation phase of saving for retirement] and trying to pay the bills and put kids through school, it’s tough and because super is so far out of reach for many of us, it’s not popular and most people won’t think about putting extra money into super,” says Ms Sofra.
The popularity of the Federal Government’s early access to super scheme for those financially affected by the Coronavirus has put the spotlight on the nation’s superannuation savings amid suggestions that taxpayers will one day be worse off because of it.
A whopping $32 billion in superannuation savings has reportedly been drained from the system under the government’s early access scheme with nearly 1 million Australian’s taking out up to the allowable $20,000 limit under COVID related financial hardship.
The withdrawals have come during a bad year for fund performance. In the calendar year to 31 March 2020, a typical balanced fund, which has investments in growth assets such as Australian and International shares of around 60-76 per cent, fell 10.5 per cent, according to SuperRatings.
The adequacy of Australia’s retirement savings system is an ongoing issue and one that is used to support calls for an increase in the compulsory super guarantee to 12 per cent by 2025. The average female has $45,000 in her super fund while the average male has $65,000, according to Australian Bureau of Statistics figures.
According to the Association of Superannuation Funds of Australia (ASFA), the average Australian needs $500,000 at age 67 to achieve a comfortable retirement and even then, they need to own their own home.
Balances of those people who self-manage their own super funds are a lot higher than those who have their savings in a retail or industry fund.
“The fact that we have 9.5 per cent from our employers going into super is a massive bonus and if we do have excess funds after paying for everything else it does usually make sense to top up your super,” says Ms Sofra.
“But right now, we are in survival mode right now.
“In the context of investing, COVID-19 is a pandemic and extraordinary circumstance and therefore we need to put our original investment strategies to the side and beef up our cash reserves for what may be ahead of us.
“There is too much uncertainty and I believe that most people that I speak to need some element of security to make them feel okay about what is ahead. Therefore, I don’t think everyone needs to panic and top up their super, because we have bigger fish to fry at the moment.
“When we are faced with extraordinary circumstances, we don’t throw the long term investment strategy out, but we park it to the side, and we may need to reassess it post COVID.
In addition to receiving contributions from your employer, SuperRatings suggests that individuals who can afford to top up their super can do so by:
Salary sacrificing: this involves arranging with your employer to pay some of your salary/wage into your super fund, the benefit is that these payments are taxed at a maximum rate of 15 per cent which is generally less than your marginal tax rate.
Personal contributions: individuals can boost their super by adding their own contributions into their super fund using their take home pay and then claiming an income tax deduction, these types of contributions are capped at $25,000 for all ages.
The government also makes a super co-contribution for low or middle-income earners of up to $500, which is automatically paid to your super fund if you’re eligible.
Bianca Hartge-Hazelman is the author of the Financy Women’s Index and founder of women’s money website financy.com.au. She is also a proud contributor and supporter of Yahoo Finance’s Women’s Money Movement.