Will you have enough money when you retire for a comfortable and financially secure lifestyle? Will you be able to afford a nice place to live and some little luxuries to reward all your hard work during your working life?
Here’s where your superannuation comes in. The best way to save for a secure retirement, your super grows in a tax-friendly environment over the long term. And unlike normal bank accounts or term deposits, there are restrictions on withdrawing money from your super account, which helps you maintain a disciplined savings habit.
The compulsory 6% of salary contributions you make, plus the 8.4% contribution your employer is required to make on your behalf, plus the interest declared each year by Nambawan Super all combine to build your eventual retirement benefit.
And thanks to the power of compounding, even relatively modest contributions can create a very attractive retirement benefit over the long term. So it certainly makes sense to consider topping up your compulsory contributions.
As a Member of Nambawan Super you are entitled to boost your super account by making Voluntary Contributions.
Why make Voluntary Contributions?
There are two very good reasons. Firstly, by making additional contributions you can increase your retirement benefit in a tax-friendly way. This means you are likely to achieve a better return through super than if you invested directly into the same assets.
And secondly, since 100% of an employee’s contributions is allowed for housing purposes, the more personal contributions you have made, the more you may be able to withdraw if you are eligible for a Housing Advance.
How much can be contributed?
Under the current super law, employers with 15 or more employees are required to contribute 8.4% of the employee’s salary to their superannuation account. Employees must contribute 6%.
Employees are allowed to boost their contributions voluntarily up to a maximum of 15%. This means you can choose a rate of additional contributions from 1% up to 9%. When deciding the rate of voluntary contributions right for you, work out how much you can afford to put away every pay period into long term savings, remembering that your contributions can only be accessed in very limited circumstances.
Alternatively, it may suit your personal circumstances to agree a salary sacrifice arrangement with your employer. If you choose this form of voluntary contribution, the maximum additional contribution is 6.6% of your adjusted salary.
You may also be able to negotiate for your employer to increase their contribution on your behalf up from the mandatory 8.4%. For example, it may make good financial sense for you to take a salary increase as additional super contributions rather than cash pay. These special employer super contributions can be from 1% up to a maximum of 6.6% of your salary.
|Employee Voluntary||Up to 9%||–||From 1% up to 9%|
|Salary Sacrifice||Up to 6.6%||–||From 1% up to 6.6%|
|Employer Special||–||From 1% up to 6.6%||From 1% up to 6.6%|
Favourable tax treatment
After 15 years of making these contributions, voluntary contributions made by your employer on your behalf and contributions from salary sacrifice arrangements, plus the interest earned on these contributions are taxed at the very favourable rate of 2%.
This is the same tax treatment that applies to the mandatory 8.4% employer contribution.
Nambawan Super Members Leo Kii, Peter Kep and Joe Rai work for the same employer and earn the same salary of K350.00 a fortnight.
Leo pays the compulsory 6% employee contribution and the employer pays the required 8.4%.
Peter is keen to boost his super by making voluntary contributions. He has worked out he can afford to contribute the maximum additional contribution of 9% of his salary.
Joe also appreciates the value of topping up his super to achieve a higher benefit at retirement. In his case, he negotiates a salary sacrifice arrangement with the employer, which works out to an additional 3% super contribution.
Fortnightly super contributions
|Member||Gross Salary||Adjusted Gross||Employee Mandatory||Employer Mandatory||Salary Sacrifice||Employee voluntary||Total|
Let’s assume Leo, Peter and Joe earn the same salary K350.00 a fortnight over a 5 year period.
Leo’s total contributions in that time will be K50.40 each fortnight.
Adding in his additional 9% voluntary contributions, Peter’s total fortnightly contribution is K81.90.
In Joe’s case, electing to sacrifice 3% of his salary increases his contributions by K8.99 every fortnight as well, because his adjusted gross salary is now lower, he may pay less tax on his pay. Because of this tax saving, making the additional super contributions has not cost Joe any extra.
For this case study, we have assumed the crediting of a real interest rate of 8% in each of the 5 years, which is a realistic rate of return over the long term. (‘Real’ interest is the declared rate less inflation).
This graph shows how making additional contributions can make a very significant difference to the amount of retirement savings even over a relatively short period, in this case 5 years.
At the end of 5 years, Peter’s super balance is around K6,000.00 higher than Leo’s. To achieve this great result, Peter has made voluntary contributions of around K4,000.00 and compounding has added extra power to the accumulation of retirement savings.
Joe’s super balance has also achieved a healthy boost. The return of his additional contributions of K8.99 a fortnight over the 5 years is around K1,500.00, on top of the tax benefits he has enjoyed over that time.
Starting up your Voluntary Contributions
To set up voluntary contributions contact your payroll section. You will need to complete the relevant application forms, including a deduction authority. Your payroll section, then arranges the necessary deduction codes so the contribution rate you select is simply deducted from your pay and paid to Nambawan Super on your behalf.
Topping up your mandatory super contributions makes good sense as an easy, no-fuss way to boost your eventual retirement savings and increase the amount of Housing Advance you may be eligible.
The earlier you start, the more the power of compounding can work to your advantage to build your retirement savings.