Originally published in The Sydney Morning Herald.

Adding even a small amount to your super now can make you thousands of dollars better off in retirement. So why don’t more people do it?

This article is part of The Sydney Morning Herald‘s six-week Super Fit series, covering everything you need to know to get your superannuation in its healthiest possible shape.

With your funds locked away until retirement, putting extra money into your superannuation early in life doesn’t feel like the most exciting thing to do. But even adding a small amount now could make you hundreds of thousands of dollars better off once you do stop working.

Currently, every worker in Australia gets a respectable 11 per cent of their earnings funnelled into our all-important superannuation funds. For many people, this is the only money they’ll ever add to their super – at least until much later in life.

But there are many ways to add extra cash to your super fund, and not only do those extra dollars boost your retirement savings and compound over time, there are a few other sweet bonuses you get as a reward for proactively looking out for your future.

What are the benefits of making extra super contributions?

When it comes to making extra contributions, the general advice is the earlier, the better. But later is still better than never according to Melbourne-based financial adviser Tom Foreman, who runs his own financial advisory as well as the website reviewmysuper.com.au.

“The main benefit of making extra contributions is long-term investment. You’re putting your funds into a great investment environment, as super funds generally have quite a good return,” says Foreman.

Then there’s the beauty of compound returns. “Money in super compounds over time. Over the long run, it’s going to add up to a much higher amount compared to if you’ve got it under the mattress or in a low-interest savings account.”

For example, salary-sacrificing $200 a month into your super starting at age 30 could see you retire with an extra $100,000 in the bank. Furthermore, there are also incentives for people to contribute, including tax benefits, Foreman says.

“If you salary-sacrifice and put some of your income into super, you don’t pay your regular income tax on that contribution. You only pay the super contributions tax, which is 15 per cent,” he says.

What sort of contributions can I make?

A contribution that comes straight from your pre-tax income, such as your employer’s contributions or salary-sacrificing, is known as a concessional super contribution. On the flip side, non-concessional contributions are those you make yourself from your after-tax income (i.e. from your personal savings).

Making a non-concessional contribution can be done via a BPAY or EFT payment from your bank account into your super fund. Non-concessional contributions are not taxed by your super fund, but keep in mind you’ve already paid tax on these equal to your marginal tax rate, making them less tax-efficient than concessional contributions.

However, you can convert these to concessional contributions and as such end up only paying 15 per cent tax by completing a “notice of intent” form for that contribution. Fill that out, submit it to your super fund, and you’ll receive an acknowledgement letter back.

You can claim this change when filing your tax return, but you’ll need to keep an eye on not crossing the concessional super contribution cap (more on that later).

What incentives can I get for topping up my super?

An incentive specifically for lower income earners is the government co-contribution. If you’re earning between $43,445 and $58,445 in this financial year, and you make a non-concessional (remember, after tax) contribution to your super, the government will put up to 50 cents in the dollar, to a maximum of $500, back into your super fund.

For example, if you contribute $500 to your super, and you’re near the lower end of the income threshold, you could get up to $250 back. See the return via the ATO’s super co-contribution calculator.

“The other benefit that’s excellent for young people is the First Home Super Saver Scheme, which essentially allows you to withdraw additional contributions that you’ve made to buy a first home,” Foreman says.

For example, if you salary-sacrifice $10,000 per year for a few years into your super, and you want to buy a first home, then you can withdraw those same contributions plus the investment earnings on that and put the sum towards a first home. You’ll want those contributions to be concessional to enjoy the 15 per cent contributions tax as opposed to being taxed at your marginal tax rate.

“Traditionally, I see most people start salary-sacrificing as they get closer to retirement, but this is an incentive for people to do it when they’re younger. The maximum someone can withdraw [under the scheme] is $15,000 per year and $50,000 across all years.”

If more than one person is buying a home, each person can apply for the First Home Super Saver Scheme, essentially doubling the benefit. If you don’t end up buying a home “the worst thing that happens is that money stays in your super”.

“It is amazing to me how many people don’t really understand salary-sacrificing. From a financial perspective, it’s a bit of a shame that people take it up when they’re older. It’s a good one from a tax benefit perspective and long-term wealth creation,” Foreman says.

The cherry on top to making extra super contributions? An extra layer of security. If you believe your super is low, or it’s lower than you’d like it to be, extra contributions can help you get to a stage where you’re setting yourself up for a “comfortable” retirement, where you can afford more than just essentials and enjoy a holiday (or two) a year.

You can check whether you’re on track to have a comfortable retirement by using the Association of Superannuation Funds of Australia’s (ASFA) “super balance detective” tool.

Are there any limits on extra contributions?

Concessional contributions are currently capped at $27,500, though this will change to $30,000 in the next financial year. You can also use carry-forward contributions, which let you make any unused concessional contributions from the previous five financial years.

“Assume you’ve contributed $10,000 the last financial year, the contribution cap on that financial year was $27,500 so you’ve got about $17,500 in excess contributions that you could ‘bring forward’ and make this financial year,” Foreman says.

“That can be excellent if, for example, someone has sold an asset, and they have a capital gain, they can reduce their income tax by putting it into super.”

The general non-concessional contribution cap is much higher, at $110,000 a year. You might be able to use a carry-forward rule for non-concessional contributions, too, and contribute up to $330,000 (technically a three-year cap) if your super balance was less than $1.68 million last financial year.

Are there any downsides to making extra super contributions?

“The main one is that it’s locked away until you’re 60, unless you’re using it for the First Home Super Saver Scheme. Or if you face financial hardship or compassionate grounds; there is a 21.5 per cent tax withdrawal for those if you do qualify, so that’s a real last-resort measure,” Foreman says.

Making extra super contributions really depends on your personal financial goals and disposable income. If you’re tossing up whether to put your money in super, to invest it or use it differently, Foreman’s advice is that it doesn’t hurt to diversify, even if that means only topping up your super a little bit.

As they say, something is better than nothing.

• Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

Featured image by Maria Ziegler on Unsplash.