Voluntary contributions to superannuation are a great way to add a little rocket fuel to your super balance. Let’s take a look at what voluntary super contributions are and how to make them.
What Are Voluntary Super Contributions?
To understand what voluntary super contributions are, it’s probably easiest for me to first explain what involuntary super contributions are.
Involuntary super contributions are the mandated superannuation guarantee (SG) contributions that your employer must pay into your super account for you. Your employer is generally required to pay SG contributions equal to 11% of your wage up to the maximum super contribution base.
Learn more about the maximum super contribution base.
All other types of contributions are considered voluntary contributions.
If you are self-employed, you will not receive any SG contributions, because you do not have an employer. Therefore, any contribution you make to super will be considered voluntary.
Types Of Voluntary Super Contributions
There are two types of voluntary contributions that you can make: concessional contributions and non-concessional contributions.
What Are Concessional Contributions?
Voluntary concessional contributions are contributions made into super that are designed to allow you to boost your super balance, while simultaneously reducing your personal income tax. Concessional contributions include salary sacrifice contributions and personal concessional contributions.
Salary sacrifice contributions are where you arrange with your employer to reduce the wage they pay you in exchange for increased equivalent contributions into your super account. This will reduce the amount of your wage assessed as personal income for tax purposes. You can only salary-sacrifice into super if you are an employee.
Here’s a video on how salary sacrifice super contributions work:
Personal concessional contributions work in a similar way to salary sacrifice contributions; whereby you make a contribution to super from your personal bank account and then claim a personal tax deduction equal to the contribution amount, effectively reducing your personal income tax. You can make personal concessional contributions whether you are an employee or self-employed.
Related article: Self-Employed Super Contributions
What Are Non-Concessional Contributions?
Non-concessional contributions are voluntary contributions made to super using money from your bank account. These contributions are designed purely to increase your super balance. Non-concessional contributions do not provide you with a tax deduction and they will not directly reduce your personal income tax.
Related article: What are Non-Concessional Contributions
How Do I Make Voluntary Super Contributions?
To make salary sacrifice contributions, you will need to get in touch with your employer or the payroll office at your place of business. You will need to notify them of how much you would like to salary sacrifice into super and which super fund you would like the contributions directed to. They should have your super fund details on file, as they will be already making SG contributions to it.
Personal concessional contributions and non-concessional contributions are made from your personal bank account into your super fund. To claim a tax deduction for a personal concessional contribution, you will need to notify your super fund of your intention to claim a tax deduction, otherwise it will simply be recorded as a non-concessional contribution. You should also not transfer any part of your super balance to another super fund prior to receiving acknowledgment from your fund of your intention to claim a tax deduction, otherwise you risk not being able to claim a tax deduction.
Related article: Super Tax Deductions
Benefits of Voluntary Contributions
The main benefit of making voluntary super contributions is that you are investing more in the tax-effective superannuation environment, where investment earnings are taxed at a maximum of 15%. The compounded benefit of this concessional tax treatment can give you a higher balance in retirement and therefore a higher retirement income. Making voluntary super contributions can also help cover the insurance premium costs of any insurances owned within your super account.
If the voluntary contributions are concessional (personal or salary sacrifice) you will also be reducing the amount of income taxed at your marginal tax rate.
Also, some employers, typically government or semi-government organisations, will increase the amount of super they pay into your account if you make voluntary contributions. Check your pay-slip to see if any voluntary contributions are being made from your wage into your super fund. If you see voluntary contributions on your payslip, you should ask your employer whether they are pre-tax (concessional) or after-tax (non-concessional).
Disadvantages of Voluntary Contributions
The only real disadvantage of making voluntary super contributions is that you cannot access the amount contributed until you retire. This is because your super is locked away until you reach your retirement age.
By making extra super contributions, you are reducing the amount of money you have immediate access to, which could otherwise be used to pay down debt or invest outside of superannuation…..or just living the good life sipping on Pina Coladas in Tahiti.
The disadvantage of concessional contributions is that contributions tax is deducted from your contribution amount when it enters your super fund. This is not the case with non-concessional contributions. Non-concessional contributions have no contributions tax.
What is the Maximum I Can Contribute as a Voluntary Contribution?
The maximum you can contribute to super as voluntary contributions is determined by the type of contribution and the relevant contribution cap.
The general concessional contribution cap is $27,500 per person. This is the maximum you can contribute in any one financial year. However, there are certain circumstances where you can contribute more than $27,500 in one year. When making voluntary concessional contributions, you should remember that SG contributions also count towards the cap.
The general non-concessional contribution cap is $110,000 per person. This is the maximum you can contribute in any one financial year. However, there are certain circumstances where you can contribute more than $110,000 in any one year.
You need to be mindful of any age restrictions, particularly for those over 67, when making super contributions.
Related article: How Much Can I Contribute to Super?
Should I Make Voluntary Contributions?
Only you can decide whether you should make voluntary contributions to super. While it can be a great way to make your superannuation grow faster, you need to keep in mind that you are unable to access any amount contributed to super until you have met certain conditions, such as retirement after reaching your superannuation preservation age, or reaching age 65.
Often, a mix of voluntary super contributions, paying down debt and investing outside super is considered a sound financial strategy. Then, as you get closer towards retirement, you might consider contributing more towards super (due to the tax benefits) and investing less outside super, knowing you don’t need to wait too long before being able to access it. Just make sure you leave some savings in the bank for any emergencies between now and retirement.
Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
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