Are you feeling confused and overwhelmed when trying to make sense of the endless jargon associated with superannuation?

You’re not alone!

With countless terms, numbers, acronyms – often, even confusing statements that can be tricky to understand – sifting through it all can leave many of us more confused than empowered.

But don’t worry I am going to break down a couple of the more common terms you will hear around superannuation or super as it is more often called.

For most of us our superannuation will be our biggest asset after our family home and yet many of us take more time planning the annual family holiday or what TV we are going to buy than planning for our retirement.

Remember superannuation is your wages when you retire and should be shown some love on a regular basis, so even if you find superannuation mind numbingly boring and confusing you owe it to yourself to learn how to make your super work hard for you.

Ok, so you have decided that ignoring your super is not going to be what you do. You are going to take an active role in your superannuation, making sure that you have all your ducks in a row so that you can live the life you want in retirement not just the life that you can afford.

Afterall when you get to retirement you don’t want to scrimp and save not being able to do the things that you have waited your whole working life to have time to enjoy.

So, let’s talk about two of the key terms you need to understand when it comes to super.

Concessional and non-concessional.

Let’s start with what a concessional contribution is.

A concessional contribution is money received by your super fund from what is called pre-taxed income or put more simply, money that has been claimed as a tax deduction either by yourself or by your employer.

These contributions when received by your superannuation fund are concessionally taxed which means that the superannuation fund will pay tax on those contributions at a special low rate of 15%.

Concessionally taxed simply means that a more favourable or lower tax rate is being used than what would typically be paid on that income outside of superannuation to help you save for your retirement.

Being concessional taxed means that less money is paid to the tax office in taxes, which means more money is available to invest and grow than would be the case outside of super.

It also means that there is more money available for compounding to do its magic.

Let’s use an example here.

Say you received a bonus income of $10,000. Most people fall into the 34.5% marginal tax bracket so you would pay tax of $3,450 in your own name. This would leave you with $6,550 to invest. Now if you invested that $6,550 for 10 years at 5% interest rate you would have a balance of $10,778. Meaning your investment would have earned interest of $4,238.

Now let’s look at the alternative of asking your employer to pay that bonus into your super fund.

In the superannuation fund that $10,000 will pay tax of $1,500 – remember concessional contributions are tax at 15% in super. So that means your super fund will have $8,500 to invest.

Now using the same investment period of 10 years and the same interest rate of 5% as we did before, after 10 years you would have $14,000 rather than the $10,778. An additional amount in your investment of $3,222 simply because you have put that $10,000 into superannuation as a concessional contribution.

You still pay tax on the money, but the money is taxed in the superannuation fund not outside of superannuation. And there is the benefit of concessional tax treatment. An extra $3,222 simply because you chose to invest your money in superannuation rather than in your own name.

For this simple example I have ignored the tax that would be payable on the interest you receive on that invested money, but again that would only be taxed at 15% inside your superannuation fund but at your marginal tax rate if you invested the money in your own name. This would make the savings even better in your super fund.

There are caps of course as to how much you can put into your superannuation as a concessional contribution because the ATO doesn’t want everyone’s income to be taxed at these concessional rates rather than at the full rate outside of superannuation.

Currently that amount is $27,500 per year. This is called your concessional cap.

From 1 July 2018 the super rules were changed to allow anyone who has less than $500,000 in super to carry forward any unused concessional cap from the previous 5 years. This means that if you didn’t use your full concessional cap in the last 5 years you can contribute into superannuation this years $27,500 plus the unused concessional cap from those earlier years.

This is called a carry-forward contribution and it is a great strategy if you get a bonus from work, an inheritance, sell a rental property that has a capital gain on it or just a great little strategy if you are trying to catch up on your super getting ready for retirement.

I will go over this more in another video so keep an eye out for that one.

So now that you know what a concessional contribution is you need to know what type of contributions are classed as concessional.

The first and most obvious one is the super guarantee.

This is the compulsory super contribution that your employer needs to make for you. If you are over the age of 18, employed fulltime, casual, part time or a temporary resident your employer needs to contribute to your superannuation on at least a quarterly basis.

If you are under 18 years of age or employed in a private or domestic arrangement like a nanny, then you will only have this type of super paid if you work more than 30 hours a week.

Superannuation guarantee does not apply to all your wages so it is important that you understand what your employer should be paying superannuation on. I have a check sheet on this, so if you would like a copy please comment below and I will get that to you. 

The next is a salary sacrifice arrangement.

This is where you have negotiated an arrangement with your employer to reduce the wages paid to you and instead that amount is contributed into your superannuation fund. It is important to remember that it is up to your employer whether they are prepared to do this. It is not something that you can force them to do.

However, there is another way to achieve the same result, I will cover that one next.

It is important to know that your employer has to contribute to your superannuation under the super guarantee payments on the full amount you should have been paid not the amount after you have salary sacrificed.

There are age limits that apply to this type of arrangement so please check before you start.

The last main type of concessional contributions is a personal contribution that you claim as a tax deduction in your own personal income tax return. This has been possible since 1 July 2017.

You do need to complete what is called a Notice of Intent to claim a Superannuation Contribution and submit it to your superannuation fund and have it accepted or what is called acknowledged by the super fund prior to claiming it in income tax return.

If your employer will not allow a salary sacrificed arrangement this will achieve the same result, so keep this in mind. The only downside to doing it this way rather than as a salary sacrifice is that the income you want to put into super has already been taxed by your employer, so you need to wait until you lodge your income tax return to get your tax back.

Again, there are age limits that you need to be careful of so check before you put this strategy in place.

Now let’s talk about non-concessional contributions.

As you might have guessed non-concessional contributions are those contributions received by your super fund that have been made from after tax income. In other words, the contribution has not been claimed as a tax deduction either by yourself or your employer.

Because these contributions are not being claimed as a tax deduction by either you or your employer, they are also not taxed in the superannuation fund. This means that 100% of the money received by your superannuation fund stays in the fund to grow for you to use in retirement.

Just like concessional contributions there are limits on the amounts of non-concessional contributions that you can add to your superannuation fund each year.

Currently this is $110,000 per year but you can bring forward the next 2 years contributions, meaning you can, if you meet the eligibility criteria contribute $330,000 in the one year.

It does mean that you can not make any further non concessional contributions into your superannuation fund until those next 2 financial years have passed.

This is a great strategy if you have received an inheritance, cashed in an asset or sold a business and you want to take advantage of the concessional tax treatment that we talked about earlier.

There are other contributions that can be made to your superannuation fund such as the Downsizer contribution, the First Home Super Saver Scheme, Government Co-contributions and even Spouse Contribution Splitting but other than the downsizer contribution they are all either a concessional or a non-concessional contribution.

However, all these types of contributions are such important aspects of superannuation that they need to be covered in a separate video. So please keep an eye out for those.

Remember retirement is different for all of us and it is important that you spend some time understanding what you need, to live the life you dream of in retirement. Planning is the key ingredient to ensuring that you are able to enjoy retirement when it comes, whether that is in the next few years or is a few decades away.

It is never too early or too late to take charge of your retirement.

Make today the day that you start doing this.

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