Stepping up with super: higher cap raises savings options

Australia’s superannuation system may be one of the most advanced in the world but it’s never progressed smoothly – stepping left or right, back or forward, depending on the prevailing political, regulatory or financial conditions.

But the latest iteration of super’s saving rules is definitely a step in the right direction. After two years of no movement at all (and following a giant step backwards), the government has at last raised the general cap for concessional contributions to super.

Stuck at $25,000 for the past two financial years, the Australian Tax Office announced late in February that after an indexation increase the annual super concessional cap would rise to $30,000 from the 2014/15 tax period.

At the same time, a temporary higher cap of $35,000 that had been available to individuals aged over 59 will now be extended to those over 49 – although this amount has not been increased via indexation.

The concessional cap, however, is still substantially lower than the $100,000 that applied to over 50s during the 2007-9 tax years and the $50,000 limit set for the subsequent two financial reporting periods.

Nevertheless, the latest cap increase is good news for people looking to boost their retirement savings via the tax-effective super environment.

The change also implies a higher non-concessional (or after-tax) super contributions limit, which is set at six-times the general concessional cap. Therefore, from July 1 this year, all members under 65 will be able to contribute an additional $180,000 to super out of after-tax money compared to the current $150,000.

As the rules allow members under 65 to pay in up to three years’ worth of non-concessional contributions in advance, from this July individuals could top up their super to the tune of $540,000 in one hit.

Of course, not everyone has a spare half-a-million to throw into super, however, we recommend everyone should at the very least try to make the most of the higher concessional limits.

While the higher cap doesn’t kick in until the 2014/15 tax year, now’s the time to start planning how to maximise the benefits - self-managed super fund (SMSF) trustees, in particular, should be revising their contributions strategies.