Making the Most of Superannuation on a Lower Income

As a graduate student I’ve spent most of my adult life (the last 11 years) working casual or part-time, with only 12 months in paid full time work between degrees in 2008. This has meant a lower income for me, between $6,000 p.a. as a teenager and approx. $40,000 p.a. now (and I’m still studying full time!).

As others in this situation may experience, there is a significant opportunity cost in forgoing immediate income and accompanying  employer Superannuation contributions (currently 9.5% of salary)  and potential returns given the time value of compounding (i.e. the sooner you start compounding, the greater your investment returns, all else being equal). This has a significant negative effect on both capital base for Superannuation and Superannuation returns.

On a lower income, these are the 2 ways I’ve used to  improve my Super contributions (and therefore potential returns) in the long run:

  1. Voluntarily pre-tax contributions.

For those who earn less than $37,000 the Government Low Income Super Contribution (LISC) provides what is essentially a “tax-refund” for employer concessional pre-tax contributions, up to $500 p.a. Since tax on Super contributions is set at a flat rate of 15% you can receive the full $500 from the Government if your employer makes $3333.33 in concessional contributions (you can ask your employer to increase your concessional contributions on your behalf, but the obvious drawback is that it reduces your take home pay). This is effectively a 15% return for the first year on the $3333.33 invested and perhaps worth considering if you don’t need the funds in the bank (in the next 40 or so years!). Even if you don’t increase your concessional contributions, you’ll still receive the LISC on the component naturally paid by your employer on your behalf if you earn less than $37,000 and meet the other conditions listed by the ATO. This is the path I’ve taken, as my concessional contributions are generally very low, and the income required to live. It’s worth noting that the Governemnt has plans to end the LISC on 1st July 2017.

2. Voluntary after-tax contributions which may qualify for the government co-contribution

In 2014-15, compared to the $3333.33 required to gain the full $500 LISC from the ATO, Government Co-contributions represent a potentially better ‘bang for your buck’ requiring ‘only’ $1000 of after tax investment for a $500 co-contribution from the ATO (i.e. a 50% return on the allocated $1000 for the first year). In earlier years, the co-contribution was much higher, and up to $1.50 per $1 invested (depending on your income), to a maximum entitlement of $1500 if you invested $1000 after tax and earned less than the minimum threshold (e.g. in 2004-05 this was $28,000) and met other conditions set byt the ATO. You could capture a portion of the co-contribution up to a maximum threshold which was actually quite generous (see thresholds and the ATO co-contribution calculator for further info).  On a low income, this can make a meaningful difference. Consider someone who had made the $1000 investment after tax every year since the Super Co-contribution commenced in 2003-04 to the most recent 2015-16 financial year.

For a total $13,000 invested, they would have received $13,500 in co-contributions, more than doubling their Super balance before earnings and interest.

Looking back over this 14 year period (2003-04 to 2015-16), at an arbitrary 7% annual return on investment this represents a potential $47,174 balance in the 2016-17 financial year (See Figure 1 below).

Super Co ContributionsFigure 1. Compound annual value of $1000 invested p.a. at 7% with and without the Government co-contribution over 14 years.

Subtracting the $13,000 plus its share of interest earnings, that’s an additional risk free return of $24,115.

Where to from here?

It’s hard to know what future Governments will legislate, but it seems unlikely that co-contributions will return to $1000 or $1500 for your $1000 investment in the current economic environment. Even at the current $500 maximum co-contribution the boost to investment capital and returns is meaningful. In the above example with returns of 7%p.a., if all co-contributions from the Government were just $500, the investor would still have a balance of $33,834 from $13,000 invested over 14 years.

For someone under 35 or on a lower income, that’s a fantastic boost to their retirement account. Whilst I haven’t been able to capture every co-contribution, I’ve acquired enough for a meaningful benefit to my retirement account.

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