Most people see superannuation as tomorrow’s problem. As long as your employer is making the mandatory 10.5% contribution into your account there’s nothing more to it. You can worry about the rest in 30 or 40 years.
But as the coronavirus pandemic, and the associated early access measures have shown, things aren’t always that simple. The reality is the decisions you make today can have lasting, long-term impacts.
According to Greg Combet, Industry Super Australia Chairman, withdrawing $20,000 from your super today under the early access rule could cost you $180,000 in the long run.
While our calculations suggest that the difference is probably closer to $45,000 less in super (after allowing for the effects of inflation and the possibility of lower returns in future), the point stands. Withdrawing money now will cost you in the long-term.
So, how do we strike a balance between immediate needs and long-term benefits? And what can you do if you’ve had to access part of your super early?
3 ways to boost your balance
An estimated 2.9 million Australians have accessed part of their super under early access rules. By the time the scheme ends at the end of the year it’s predicted that $42 billion will have been withdrawn.
That’s a significant amount of money that’s no longer benefiting from superannuation’s compounding interest and low tax rate. If you’re in a position to do so, it’s important to replenish those funds when you’re able to do so.
So how do go about topping up your account? There are a number of immediate actions you can take:
1. Start salary sacrificing
Salary sacrifice means you pay some of your pre-tax salary into your super account. As well as boosting your super balance, salary sacrificing can potentially reduce your tax rate. Which means:
- Your super balance grows faster, and benefits from compound interest.
- You pay less tax on your additional contributions (15% rather than the marginal income tax rate).
2. Find and consolidate super
We can help you track down any lost super you may have and consolidate it all into your Equip account. Having all your super in one account means you save money, since you're only paying one set of annual fees.
3. Make an after-tax contribution
You can top-up your super account at any time. It’s as easy as making a BPay payment and has potential tax advantages. If your income is below the threshold you may also be eligible for a co-contribution payment from the Federal Government. This matches every dollar you contribute with an additional 50 cents from the Government, up to $500 annually.
Buy now pay later
When it comes to super, there’s always been tension between today's needs and what’s down the road.
But the reality is that super is one of the most effective ways to build long-term wealth. That 10.5% of your salary that’s put aside for the future benefits from compounding interest in a low tax environment. Over the course of your working life it grows into one of the most significant assets you own.
If you’ve accessed part of your super for immediate needs, it’s worth topping up that amount when you’re able to do so. Future you will be grateful.
Any figures quoted are correct at the time of writing but may be subject to change.
