Budgeting

High-income earners could have more opportunity to contribute extra capital to superannuation than others as the penalty tax for breaching the annual limit on pretax contributions is equivalent to the top personal tax rate.

Colin Lewis, from financial advisory firm ipac, says someone paying the highest marginal tax rate would be no worse off breaching the cap and paying the penalty tax rate of 31.5 per cent, as long as they didn’t also breach the annual cap on after tax contributions.

People could even save a little tax in 2011-12 with the flood levy.

The $5000 a year before tax equates to just over $3000 a year after tax or $59 a week from take home pay.

This extra $5000 of contributions could mean the difference between $555,000 and $898,000 at age 65 – an increase of over $340,000 to their retirement savings.

Playing catch-up

The closer you get to retirement the harder it becomes to play catch up.

A 40-year-old looking to boost their super balance by $100,000 (in today’s dollars) at retirement will need to contribute an additional $55 a week or $2860 a year (from pretax salary) based on their superannuation fund returning an average 8 per cent a year over 25 years, according to the numbers crunched by iPac Securities.

For people in their 40s the limit on the contributions that can be made from pre-tax dollars is $25,000 a year. The contribution limit for after tax dollars or non-concessional contributions is $150,000 a year or $450,000 over a three year period.

The highest marginal tax rate is 46.5 per cent plus 1 per cent for the flood levy. But if you put pretax dollars into superannuation you are taxed at the concessional rate of
15 per cent. If you breach the annual pretax contribution cap, you also pay a 31.5 per cent tax that adds up to 46.5 per cent. The flood levy will not apply.

“You are no worse off and if you pay the penalty tax from private savings the money remains in super,” Lewis says.

Enjoy the transition

For people aged 55 and above the so-called transition to retirement strategy stands out as an obvious way to top up a superannuation balance.

It kicks in at 55 because that is the age someone can draw a superannuation pension even when they are working.

Someone with such a pension could salary sacrifice as much income as possible into super and draw down the minimum amount from a pension drawn from their super to fund their living expenses.

Double the fun

The twin benefits are the generous tax concessions on salary sacrificed contributions and a low rate of tax on pension income up to age 59. Once a person reaches 60, the pension income will be tax-free.

It’s a strategy that can really work for people who want to contribute the maximum allowed into superannuation.

“If a pension covers their living expenses and they have a salary they can put back into superannuation they can save tax on that salary and draw an income tax-free,” David Shirlow from Macquarie Group says.