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Can you pay too much Superannuation. Super and taxes

Once people have got over the initial bias and fear of Superannuation and Pension funds and understand how they work, you can often see the proverbial light bulb light up in their mind. Wait a moment if I am clever here I can save myself a fortune on co-contributions or in tax deduction. The truth is that Superannuation funds and contributing towards them can often give you the best of both worlds, great investment and great tax deductions and even Government co-contribution.

Isn’t it annoying there is always a but when things seem too good to be true, there is a limit when these great benefits cease to apply. These caps are designed to assure that the Super, a system put in place to help the lower and middle classes, does not become a fail proof investment for the wealthy.

For most of us this will not be a problem. You have to invest a  lot of super to go over and above the Super fund caps and even then there are ways round it, like staggering the amount through a set of years.

Understanding how these caps work will help you make the most of Super tax breaks and incentives without exceeding the caps or limits and paying for it dearly in excess tax.

In order to explain some of the details of the caps system we are going to introduce some jargon. Sorry, sometimes it is necessary no matter how straightforward you want to explain something.

The limit or cap on your Super contributions depends on whether the contribution you are making is concessional or non-concessional. Your age is another factor that will determine the tax and the caps that are applied to your Super fund. Also if you are a member of an defined benefit fund or untaxed fund the rules that apply to you might change a little.

Let’s start by explaining what we mean by concessional and non-concessional contributions.
Concessional contributions are contributions that are made by you, your employer or some other person to a Super fund that is assessable income of the fund, by assessable income we mean income that is subject to tax. For this reason concessional contributions are also known as before tax contributions.

Among this type of contributions you can find:
Employer contributions, even those made as part of a salary sacrifice deal. Contributions made by yourself and the taxable component of a termination payment when in excess of $1 million. The following contributions are treated as concessional contributions:

In short most payments you are likely to make towards your super fund are taxable, the secret is to not go over the yearly limit or cap.

What is the current contributions cap?
As we mentioned above most of us won’t be too worried about going over the limit. The current yearly contribution cap is of $50,000 per person. If you contribute over this limit you will have to pay extra tax, what is called excess concessional contributions tax. There is somewhat of an extra break if you are over fifty as you might be in need of topping up your super fund before retirement.  Your yearly contributions limit if you are over 50 is of $100,000 per year.

Stopping And Starting Superannuation Payments, what are the consequences?

When we think of Super funds, pension funds and other long term saving plans we don’t often get very excited. They sound like important even necessary endeavors but not exciting by any measure. But other investments, like futures, the stock market, gold market, now they sound interesting.  The truth though is that the vast majority, if not all, of pension and super funds invest in the stock market. The level of risk these pension and super funds desire will be reflected in the type of stocks they invest in.

What has this got to do with starting and stopping your Superannuation Payments? A lot. Many of us view pension funds as an obligation you must carry out monthly in order to get a “right” or something we “deserve” in the future. We don’t often see it as an investment or a stock fund that can do better or worse depending of the fund it is in or the capital invested in it.

However that is exactly what Super funds are. The more you contribute the more cash your fund will have and the more it will grow. Investing in your Super fund is just like investing in the stock market for the long term but with the Government helping you out and providing you with incentives and tax cuts.

With the flexible Super system you can choose what kind of Super fund you want to invest in. If you are a bit of a risk taker you can instruct your employer to deposit your employer super contributions into a Super fund that invests in growth stock. If you are a safer investor you can choose a Super fund that specializes in blue chip stocks. You decide.
On top of this the government will pay co-contributions toward your Super fund. This means that for every dollar you invest in your fund, the Government will match it up to a certain limit. Do you know any other fund that will do that for you.

The only drawback of Super funds, and it is not really a drawback is that your cash is not accessible unless some rather stringent requirements are met, like you being dead, 60 or 65 or terminally ill. But this drawback is actually a bonus because it is probably the only way to keep most of us from tapping into our savings when we feel like buying a car, going on holiday or spending on any other “fun” project.

I hope these arguments present a powerful case for investing in your Super fund as often and as much as you can. Don’t view it as an obligation but as a privilege. If you can invest more in your fund, even if you’re not working, or you’re self-employed, do so. You are going to be hard pressed to find a better deal.