Slow and steady wins the race

Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.

Most people don't give much thought to their retirement savings - until retirement is just around the corner. Changes to super contribution caps in 2009 may mean we need to rethink the "last minute dash to the finish line", and may need to adopt a slow and steady approach instead.

In 2009, the Government made a number of changes to super. One of these was reducing the concessional contributions cap to $25,000 per financial year for people who are under age 50 and $50,000 for those who are 50 and older (on the 30 June of the year in which the contribution is made). The $50,000 concessional contributions cap is set to end on 30 June 2012 and will reduce to $25,000 for all individuals regardless of their age.

The appeal of concessional contributions (which includes Superannuation Guarantee (SG) and salary sacrifice contributions) is that they are taxed at 15% instead of your personal marginal tax rate. This may mean significant tax savings, and therefore could be a great boost to your retirement savings. However, if the cap (that applies to you), is exceeded, then an additional tax of 31.5% applies on the concessional contributions above the cap - resulting in an overall tax of 46.5% on these excess concessional contributions. And that's where the 'last minute dash' approach may fall down: if you intend to organise large salary sacrifice contributions before your retirement you may be limited or be subject to a 46.5% tax if the concessional contributions cap is exceeded.

The good news is that there are other ways you can build your super effectively. Of course, if time is on your side, you may be able to use concessional contributions to their best advantage by using a salary sacrifice strategy earlier in life; thus potentially paying less tax, putting more into your retirement savings and getting the benefit from compounding earnings.

Another way is to combine your concessional contributions with 'non-concessional' (after-tax) contributions. The limits on non-concessional contributions are much higher - $150,000 p.a. or $450,000 over three years if you are under 65.

The easiest way to see how salary sacrificing may or may not work is by looking at an example.

Lisa and Chris both make the decision to arrange a regular salary sacrifice to their super.

Case study - Lisa

Lisa starts when she's 40 years of age and arranges with her employer to salary sacrifice $10,000 on an annual basis until she retires when she's 65. Over the 25 years this totals $250,000 of concessional contributions to her super account. Importantly, over that period, her money is accumulating investment returns, boosting the savings she'll have in retirement.

Case study - Chris

Chris is 60 and wants to put as much as he can into superannuation in the lead up to retirement. He arranges with his employer to salary sacrifice $40,000 on an annual basis for the first two years and then $15,000 for the remaining three years. He has chosen these amounts of salary sacrifice as, together with the Superannuation Guarantee contribution his employer makes, he stays under the concessional contributions caps of $50,000 (for 2010/11 and 2011/12) and $25,000 (for 2012/13, 2013/14 and 2014/15). During these five years, this totals $125,000 of concessional contributions- much less than Lisa.

By starting early, and making slow and steady contributions, not only has Lisa been able to organise more concessional contributions to her super, she's also going to benefit from the positive effect of compound interest over a long period of time. By contrast, Chris has made a race to the finish line that is hampered by the cap on concessional contributions. He can still make after-tax contributions, but they may not be as tax effective.

If you are keen to build your super, think about your strategy and whether concessional or non-concessional contributions will be right for you. If you would like to start salary sacrificing to your super account, simply contact your employer to request this. If you want to make non-concessional (after-tax) contributions, please contact your superannuation provider. You should consider obtaining advice from a licensed or appropriately authorised financial adviser before making any decisions or changes regarding your super.


This information has been prepared by Mercer Outsourcing (Australia) Pty Ltd (MOAPL) ABN 83 068 908 912, Australian Financial Services Licence #411980. Any advice contained in this document is of a general nature only, and does not take into account the personal needs and circumstances of any particular individual. Prior to acting on any information contained in this document, you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering, and seek professional advice from a licensed, or appropriately authorised, financial adviser if you are unsure of what action to take. "MERCER" is a registered trademark of Mercer (Australia) Pty Ltd ABN 32 005 315 917. Copyright 2012 Mercer LLC. All rights reserved.


SA Metropolitan Fire Service Superannuation Pty Ltd ACN 068 821 750 as Trustee for the SA Metropolitan Fire Service Superannuation Scheme ABN 99 439 309 855.

This website is provided by Mercer Outsourcing (Australia) Pty Ltd (MOAPL) ABN 83 068 908 912, Australian Financial Services Licence #411980. The Trustee pays a fee for the provision of this service, however this fee is not conditional on you using this service or acting on the information or advice provided through this service.