If an SMSF is not feasible for your because your super balance is too low, or even if you have an SMSF and want to grow your super, here 5 simple strategies that are easy to put in place to help you.
How to GROW your super balance
For most people, its likely that when you run through the superannuation calculator and projections, there will be a ‘gap’ or shortfall between the income you want in retirement, and what you are likely to have in retirement. This is OK!
The most important thing is that you are now becoming engaged and taking the time to figure out what you should be doing when it comes to your long term investment assets i.e. your super. Also remember that how much super should I have is a very personal question and everyone has different work and income patterns as different lifestyle goals. Don’t let averages and other peoples situations make you feel unhappy about your own position.
The following are some common ways to Grow your super.
Please note the information below is high-level general information only and should not be relied upon as personalised advice. Refer to the Grow SMSF advice disclaimer for further information.
1. Ensure you’re getting paid the right amount of super
Having your compulsory superannuation from your employer either being underpaid or not paid at all, especially early in your working life, can have a significant and potentially devastating impact on your average super balance and impact how much super you should have later in life. Always check and ask yourself “How much super I should have in my pay?”
Regularly check your payslip and superannuation account to ensure the correct amount of super is getting paid. Employers must pay your super every quarter 28 days after the end of the quarter. They must pay 9.5% of your gross ordinary earnings, and this amount is set to gradually increase to 12% starting in 2021 (however may not happen due to COVID-19).
The ATO has some good information on what to do when your employer is not paying your super.
Don’t feel guilty about checking with your employer or payroll office about your super. It’s an essential first check you must undertake if you want to grow your super.
2. Make extra super contributions to grow your super
One relatively obvious was to Grow your super balance is simply to put more money into super!
We all save and invest for different reasons. Superannuation should be thought of as long term savings that you will access in the later part of your life. Adding extra contributions to super, even when young should is not a replacement for saving, investing and wealth creation outside of the superannuation environment. You should try to do both as they work well side by side.
There are a number of different ways you can make additional contributions to help grow your super:
Salary sacrifice contributions
Salary sacrifice is where you elect to have a portion of your before-tax income paid into your super by your employer which is over and above the mandatory 9.5% they have to contribute on your behalf.
The amount contributed goes directly from your employer to your super fund account (including an SMSF) and is taxed at 15%. Salary sacrifice contributions are concessional contributions and the $25,000 annual contribution cap applies.
One key thing to watch out for with salary sacrifice contributions to grow your super is if your employer goes bust, it will take longer for any sacrificed amounts to be recovered and paid to you. To remove this risk, look at tax deductible personal contributions.
Tax deductible personal contributions
Tax deductible personal contributions are also voluntary contributions, which you can make using after-tax dollars (such as when you transfer funds from your bank account into your super) and then claim a tax deduction on when doing your tax return using a Notice of Intent to Claim form.
Like salary sacrifice these contributions are also taxed at 15% when they hit your superannuation account and they also count towards your $25,000 concessional contribution cap.
There types of contributions used to only be available for the self-employed (i.e. people where 10% or less of their income came from employment) however with the 10% rule for superannuation contributions being abolished, everyone regardless of being self-employed or receiving PAYG wages or salary can access these contributions and deductions.
These contributions are useful to claim an additional tax deduction in a financial year where your income is higher than normal – for example if you’ve received a bonus or had a capital gain on the sale of an investment or asset (shares, property etc.). This is a great strategy to simultaneously grow your super and save you tax!
In addition, where your total superannuation balance is under $500,000 the amount unused of your $25,000 annual cap on a rolling five year basis.
After tax contributions (non-concessional)
In addition to tax deductible concessional contributions, each individual (under the age of 67) can make an annual after tax contribution of $100,000 per year, or by triggering the bring-forward rule, $300,000 at one time.
There are special rules if you are over age 65 in regards to the bring-forward rule (this hasn’t been increased to age 67 at this time – but should be come November 2020). The ability to make non-concessional contributions is also impacted where a persons total super balance is over $1.4m – although if your super balance is at this level, it’s a good problem to have.
After tax contributions are useful where a windfall amount of cash has been received, for example form an inheritance and the money is not immediately needed – i.e. you are close to retirement age.
Co-contributions are available when you make an after-tax contribution to super and don’t claim a tax deduction. Where you income is $37,697 or less the Government will automatically credit your super account $500 when you make a contribution of $1000.
These types of contributions are especially useful for younger workers. Think about making these contributions on behalf of teenage children / young adults when they first start earning an income from a part time job or are early in their careers. An extra $5,000 for example generates $2,500 in Government co-contributions across 5 years and due to the power of compounding can have a significant impact come age 60.
Co-contributions as well as the catch-up concessional contributions provisions and spouse contribution splitting are useful ways to boost the super balance of women (and men) who’ve taken time out of the workforce to have and look after children.
A person over age 65 can make a one-off non-concessional contribution of up to $300,000 from the proceeds of their principal residence (including part of their principal residence) provided that property has been their principal residence for at least 10 years prior to sale.
Both members of a couple can use the downsizer contributions on the sale of the same property and there are no restrictions in regards to total superannuation balance, the $1.6m transfer balance cap or requirement to meet the work test. Also there is no actual requirement to downsize!
3. Combine multiple super accounts
Half of Australian workers have more than one super fund but when it comes to super accounts, less is more. Extra accounts can attract more fees, confuse your employers, and crowd your letterbox at tax time.
You can save time, money and precious surface area by folding multiple balances into a single fund. Before consolidating, check for any insurance quibbles and exit fees, then head to MyGov again. The website can help you roll them into one with just a few clicks. Having all your super in one place is the great way to help you grow your super as seeing it all in one place makes it easier to manage and more visible.
4. Ensure you’re in the right super fund with the right investment strategy
Fortunately, most Australians have full choice when it comes to the super fund account they choose. Although all employers have a default fund if you don’t provide super fund account details, you can chose to have your contributions paid into any super fund you like (including an SMSF).
There are some exceptions for people working under an enterprise bargaining agreement or registered agreement that came into place before 1 January 2021, however moving forward all workers have superannuation choice.
What is the right super fund for me?
The super fund with the highest returns and lowest fees of course is the best! However, how do you determine what fund that is?
You can’t control how your super fund performs year to year, however you can control fees as well as the investment strategy applicable – i.e. how and what your super is invested into.
A great resource to look at is the Stockpot Fat Cat Report. This report looks at over 600 superannuation funds and provides details on fees and investment returns.
What super investment strategy should I use?
A good rule of thumb is that typically the younger you are and the more years you are away from retirement, the more risk your superannuation investment strategy can handle and the higher growth option should be selected. Selecting the right investment strategy a key way to grow your super regardless of age.
The logic with this is that many people sit in a default ‘Balanced’ option, however if they are younger they should be in a higher growth option as they can ‘whether the storm’ when it comes to fluctuations to their investments in the short term. As per approach retirement they typically would move into more conservative investments with lower risk and likely lower returns. In other words the investment strategy is based on life stages.
Once again, this article cannot replace personalised financial advice and we again refer you to our advice disclaimer.
5. Investigate whether an SMSF is right for you
A self-managed super fund is one of many superannuation options that is available.
In terms of growing your super, an SMSF can be useful because:
- Fees can potentially be saved as you can combined multiple members into the one SMSF (typically members of a couple);
- You have full control over the investment strategy;
- You are likely to be more actively engaged in your superannuation investments;
- It may be easier to implement certain strategies compared to an industry or retail superannuation fund;
- There are many types of investments that are available through an SMSF that are not directly available via an APRA regulated superannuation fund (for example direct property, collectibles, investments into unlisted and private companies etc.
There are of course disadvantages and a number of other factors to be aware of and again, this article cannot replace personalised financial advice and we refer you to our advice disclaimer.