Superannuation changes from 1 July set to boost retirement savings of millions of Australians
Kelly Power
Leading superannuation provider Colonial First State is encouraging Australians to make the most of the 1 July changes to super, saying the planned super guarantee (SG) increases as well as expanded concessional contributions are a major win for millions of Australians.
Millennials can make an extra $650,000 at retirement by maximising the new increase in concessional super contributions under the changes.
Starting 1 July, the superannuation guarantee is legislated to increase from 9.5 per cent to 12 per cent in 0.5 percentage point increments each year, from 2021 through to 2025. In addition, the annual concessional contributions cap is also set to increase from $25,000 to $27,500 enabling Australians to put more into their super to further grow their retirement savings pool.
In its latest analysis, CFS has calculated what the 1 July super changes mean for Australians in real terms, and how they stand to gain from the SG increases alone, and if they also take action to maximise their voluntary contributions (see below).
Younger Australians with a higher number of working years ahead of them stand to gain the most in their retirement from the superannuation guarantee increase to 12 per cent.
For a 35-year-old, the increases will add just over $86,000 to their retirement nest egg with no additional action required from their end. However, if they wish to maximise the increase in concessional contribution caps, this benefit jumps to a $650,000 extra in retirement.
For a 45-year-old, the SG increases add just over $51,000 to their retirement savings, but with additional salary sacrifice to the maximum limit permitted, it translates to over $400,000 at age 67.
Colonial First State General Manager, Kelly Power, said 1 July was a great opportunity for Australians to reset and reboot their retirement savings plans for their future.
“The boost for retirement balances is greatest for younger workers, thanks to the power of compounded investment returns. This is particularly true for those who withdrew their super early last year to deal with the pandemic and cover basic expenses, now is the time to start making up some lost ground by using these contributions to replenish their super and rebuild their nest eggs” she added.
For pre-retirees aged 50-64 years with a higher disposable income but fewer working years ahead of them, maximising the annual concessional contribution caps of $27,500 will mean they are empowered to put more away into their retirement savings pool while enjoying greater tax savings in the range of 15 to 30 per cent, depending on their marginal tax rate.
For a 50-year-old, while the superannuation guarantee increase adds over $36,000 in their super payments, maximising concessional contribution caps through salary sacrificing can make them more than $296,000 better off in retirement
For a pre-retiree aged 60 with only five-to-seven years to retirement, the changes from 1 July would enable them to gain an additional $100,000 in retirement by making voluntary contributions to the maximum extent permitted.
“These additional savings in your super will determine the lifestyle you enjoy in your retirement years. It could mean treating yourself with an extra holiday each year or being able to keep your family home where you have an emotional connection instead of downsizing, or even helping to pay for your grandchildren’s school fees,” said Ms Power.
Strategies to optimise super changes
It can be difficult to determine how much of your income to use to top-up to your nest egg each year, as it varies depending on your age, employment status and current financial situation.
However, Ms Power urged Australians to actively engage with their super and take positive steps to make sure they can live comfortably in retirement.
- For millennials aged 18-39 years: You automatically benefit through your employer making higher superannuation guarantee contributions. A general rule of thumb to improve your financial wellbeing is to manage debt appropriately, particularly high interest debts such as personal loans and credit cards. To get ahead of the curve with your super savings for the future, starting small but starting early is recommended. For instance, an additional contribution of $20 a fortnight from pre-tax income by salary sacrificing, can mean an additional $25,000 at retirement. As it is pre-tax, this would only equate to a reduction of $13 from your after-tax income per fortnight.[1] For those who withdrew super during the Covid-19 early release program, think about replenishing it outside of the super guarantee.
- For wealth accumulators aged 40-49 years: If you receive a lump sum bonus or other payment, you can make a personal deductible super contribution up to the remaining contribution cap to reduce your taxable income. Beyond this, paying your mortgage down quickly has long been a sound wealth-building strategy and can free up more of your money for other things. If your spouse earns less than $40,000[2], you may also qualify for a tax offset of up to $540[3] where you make an after-tax contribution of up to $3,000 to their account.
- For pre-retirees aged 50-64 years: This is the perfect time to build or replenish their retirement savings. Catch-up concessional contribution rules allow people to use their unused cap amounts for up to five years before they expire by either sacrificing salary or making personal deductible contributions. This is especially useful for those who have needed to focus on other financial priorities ahead of their retirement savings.
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