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Concessional Contributions

A woman diligently organising her finances for retirement, engrossed in the process of calculating concessional contributions. The well-lit room showcases her determined posture as she expertly utilises a calculator and examines papers with a pencil in hand.
Retirement Planning Successful retirement planning requires your investments to last your entire life after-work, which requires a long term and well thought out structure for you to achieve this.

Superannuation plays a vital role in securing your retirement, one of the key ways to enhance your super account is through concessional contributions. Concessional contributions to superannuation are a powerful tool for maximising wealth and ensuring a secure retirement in Australia. Understanding and effectively utilising concessional contributions can significantly benefit your retirement savings. In this blog, we will delve into the intricacies of concessional contributions and outline strategies to help you leverage these contributions and reap the benefits. 

  1. Understanding Concessional Contributions  
  2. Strategies for Maximising Concessional Contributions  
  3. Tax Considerations & Benefits  
  4. Eligibility & Contribution Limits  
  5. Impact on Retirement Savings  
  6. Potential Risks & Considerations 
  7. How Yield Can Help  

Understanding Concessional Contributions:

Concessional contributions, not to be confused with non-concessional contributions, are contributions made to your superannuation fund from pre-tax income. These contributions are considered concessional because they are taxed at a lower rate compared to your regular income. The annual concessional contribution cap is currently set at $27,500 (as of 2023-2024). It’s important to note that exceeding this cap could result in additional tax liabilities. 

Concessional contributions can come from a range of sources including, employer contributions, salary sacrifice arrangements, and your post-tax income. Employer contributions to your superannuation are made on behalf of you by your employer with a percentage of your salary. Salary sacrifices are an arranged agreement between you and your employer, which allow you to contribute a portion of your choosing from your pre-tax income directly to your superannuation. Contributions from your post-tax income allows you to concessionally contribute to super using the money received from your take home pay and claiming a deduction. These contributions in turn reduces your taxable income. By understanding the different types of concessional contributions, you can make more informed decisions about building a strong retirement fund.  

Animated depiction of a man and woman climbing a ladder on a savings jar in the foreground, symbolising their efforts to add concessional contributions and build substantial wealth for their retirement savings.

Contribution Strategies for Maximising Concessional Contributions:  

Adopting an effective contribution strategy is essential for maximising your concessional contributions. Salary sacrifice arrangements are one such strategy that allows you to contribute more to your super while reducing your taxable income. By sacrificing a portion of your pre-tax income, you can increase your concessional contributions, accelerating the growth of your retirement savings and benefiting from the lower tax rates which apply to superannuation.  

 Another strategy worth considering is catch-up contributions. Introduced in 2019, catch up concessional contributions allow individuals with a total superannuation balance of less than $500,000 to carry forward any unused cap amounts, (e.g., $27,500 for the 2022/2023 financial year) for up to five years before they expire. This strategy enables you to make additional contributions in years when your financial circumstances may allow you to contribute more comfortably.  

Tax Considerations & Benefits: 

There are several tax advantages making concessional contributions can offer you. Firstly, by concessionally contributing a portion of your income to your super account, you reduce the amount of income you are taxed on, therefore resulting in lower income tax liability. It is also important to note that within your superannuation fund, concessional contributions are taxed at a minimum rate of 15%, which is significantly lower than the marginal tax rates for most individuals.  

However, when you withdraw your savings in retirement, they may be subject to tax. This depends on your age and the amount withdrawn. Understanding the tax implications at the time of withdrawal is crucial for an effective retirement planning strategy.  

Eligibility & Contribution Limits:

There are certain eligibility requirements which must be met before you are able to make concessional contributions. Typically, anyone under the age of 67 can make any type of concessional contributions, however if you are aged between 67 and 75 years old, you must satisfy the ‘work test’ by working at least 40 hours over a consecutive 30-day period in the financial year before you are able to make concessional contributions from your post-tax income. This ‘work test’ does not apply for employer contributions or salary sacrifice arrangements while you are between ages 67 and 75.  

 Contribution limits can vary based on age and exceeding these limits may result in higher tax liability, in line with marginal tax rates. However, as of July 2021, the concessional contribution limit was raised to $27,500 irrespective of age. Understanding these limits can ensure compliance and avoid potential penalties which may otherwise impact your overall retirement savings strategy and create unwanted roadblocks in your financial plan.  

A couple engages in a thoughtful conversation with a female financial advisor in the foreground, discussing their concessional contributions and retirement plan. The advisor confidently presents papers illustrating the couple's personalised retirement projections and strategy. In the backdrop, a serene light green scene adorned with leaves provides a calm atmosphere. The top right corner bears the branding of Yield Financial Planning, adding a professional touch to the image.

Impact on Retirement Savings: 

Concessional contributions can create a significant long-term impact on your retirement savings. These contributions grow over time through the power of compounding, allowing individuals to accumulate a larger nest egg for their retirement. Starting early and contributing consistently can make a substantial difference to your final retirement savings balance, providing you with an opportunity to harness the advantages that come with longer investment horizons and potential market growth and securing you a more comfortable retirement in line with your financial goals.  

Potential Risks & Considerations: 

While concessional contributions offer numerous benefits, it is essential to be aware of potential risks and considerations associated with them. One such risk is the impact of changing government policies on superannuation. These changes can affect factors such as, contribution limits, tax treatments and withdrawal rules, which can result in penalties if not correctly observed. It’s important that you keep informed on these changes, and regularly review your superannuation strategy to help mitigate any potential risks or shortcomings. One way to navigate these changes is seeking help of a high-quality financial advisor, to guide you through these policies and work alongside you to continuously optimise your strategy through scheduled reviews.  

Additionally, market volatility and investment risks can impact the performance of your retirement savings. Diversifying your investments is crucial and seeking professional advice is recommended to manage potential risks associated with investing. Maintaining a proactive approach to changes in policy and investment strategies will help you make more informed decisions to safeguard your superannuation fund and realise your full financial potential.  

A lady with financial peace of mind

How Yield Financial Planning Can Help: 

The advisers at Yield Financial Planning offer tailored advice solutions to align with your unique financial goals and circumstances. Our team of experienced advisors work closely with you to develop personalised contribution strategies, considerate of factors like eligibility, contribution limits and tax considerations. Yield advisers can provide you with insights you need when considering salary sacrifice arrangements, catch up contributions and investment diversification to benefit your superannuation and secure your ideal retirement lifestyle. You can contact us today to learn more and start the conversation about how concessional contributions could benefit you and your retirement.  

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Free Consultation

Free Consultation

Get started with a free strategy consultation and receive a copy of the Good Fortune Guide – written by James McFall, Managing Director Yield FP and 2020 National Finalist Certified Financial Planner of the Year to help educate you on your Financial Plan.