Sequencing is key to maximising your superannuation contribution strategy

When legislative changes to superannuation contributions came into effect on July 1 this year, there were several reasons for pre-retirees to rejoice.

The removal of the work test for making personal contributions and the increases to contribution caps will make a big difference to future superannuation balances of many Australians. However, while certain obstacles may have been removed for some, there are still a number of conditions that must be met. The timing and sequence of contributions is critical to ensuring pre-retirees maximise the superannuation benefits available to them.

Non-concessional contributions and downsizer contributions

• The new non-concessional contribution cap is $110,000. A member under the age of 75 years old could potentially make non-concessional contributions into the Fund up to $110,000 as long as their total super balance at the end of the previous financial year is less than $1.7 million.
  
  
• Members with a balance of under $1.48m at 30 June last financial year could make a non-concessional contribution of up to $330,000 under the three year bring forward rule provided that they are under 75 years of age at some point during the financial year.
  
  
• The downsizer age limit has been reduced to 60 years of age from 1 July 2022. Members who are in a Fund with their spouse could make up to $600,000 in total from the proceeds of the sale of their primary residence. Its important to note, downsizer contributions can be made regardless of your total superannuation balance.

Non-concessional contributions and unused carry forward concessional contributions

• The ATO now allows members to utilise their carry forward concessional contributions (contributions in which you can claim a tax deduction) from the last 5 years if their total super balance is under $500,000 at the end of the previous financial year.

Timing and sequence is crucial to get maximum benefit

The sequencing and timing of contributions can have a big impact.

For example, if a member intends to make a downsizer contribution, they should first consider any potential non-concessional contributions that they could make, as the downsizer amount might push the member’s balance over the $1.48m limit at the end of the financial year. This is especially important if both contributions could not be made in the same financial year.

If the member has a balance of under $500,000 and would like to put some concessional as well as non-concessional contributions into their Fund, it might be best to use up the unused portion of the concessional contribution cap before putting in any large non-concessional contribution amount.  If the timing of the contributions is not well considered and the member’s balance goes over $500,000 at the end of the financial year, the unused concessional contribution cap will no longer be available next financial year. 

In summary, to maximise their superannuation a member may want to consider making contributions in the following order:

1. Unused concessional contribution caps (total super balance under $500,000 at the end of last financial year required).
2. Non-concessional contribution (total super balance under $1.7 million at the end of last financial year required, more if member wishes to utilise the bring forward rule).
3. Downsizer Contributions (no total super balance consideration required).

This information is general in nature and is provided by Partners Wealth Group. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.