Article by David Press (B.Comm)

 

For low to middle income earners, ensuring they have enough retirement savings is a genuine concern. The 9 per cent superannuation guarantee may not be enough for many as living expenses increase and desired lifestyles of retirees start to stretch their available funds.

 

The Australian Government co-contribution is one strategy available to low and middle income earners as a tool to grow their retirement savings. In a nutshell, an individual earning between the allowable thresholds, makes an after tax contribution to their chosen superannuation fund. The government then makes a matching contribution up to 150 per cent of the individual’s contribution to a maximum of $1500. Essentially it is an instant return of up to 150 per cent on the individual’s investment, making it quite hard to go past when one considers the ongoing benefits of compound interest and the concessional tax rate of 15 per cent inside a superannuation fund.

 

For financial year 2008/09 the threshold is a maximum of $60 342 taxable income. The government contributes $1.50 for every $1.00 invested to a maximum co-contribution of $1500, however the maximum co-contribution reduces by 5c for every $1.00 earned over $30 342 to the maximum threshold of $60 342.

 

As an example, John Smith earns $48 000 per annum before tax. The maximum co-contribution and therefore the minimum he must invest into his super are calculated as follows;

 

$1500 – $0.05($48 000 – $30 342)

$1500 – $0.05($17 658)

$1500 – $882.90

$617.10 = Maximum Co-contribution from the government.

 

The minimum John must invest is $617.10 divided by 1.5 as this is the amount the government will co-contribute for every dollar he invests. This equates to a minimum after tax investment of $412 (rounded) in order to receive the maximum co-contribution on his current pre tax income. The combined contribution is $1029.10 for an outlay of only $412 by John.

 

For the 2009/10 budget the government has reduced the co-contribution amount to 100 per cent, which will remain in place until the 2012/13 financial year in which the co-contribution moves back up to 125 per cent and back to 150 per cent from 2014/15 onwards. Despite this reduction, the available returns are still attractive and should be considered a viable option to those earning within the thresholds.

 

Each investor’s situation is different and each has differing needs and financial objectives, as such it is strongly recommended that you seek financial advice from a trained professional. This article provides general information only and should not be considered advice.