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The super co-contribution: Still amongst the best deals in town

Feb 06, 2015

If you were walking down the street and saw $500 lying on the grouMoneynd, what would you do?

Would you walk past it or pick it up?

It's a no brainer, isn't it? Of course you'd pick it up.

Unfortunately, thousands of us, when it comes to our superannuation, are walking right past the free money.

For people on low to middle incomes the Federal Government offers the chance to significantly boost your retirement income with the offer of up to $500.

It's called the Superannuation Co-Contribution.

To get that free money you have to contribute an extra thousand dollars of your own money to your superannuation account. The Government will then automatically add the co-contribution.

The co-contribution was introduced by the Howard Government in 2003 to help those at the bottom of the income scale provide for their own retirements and therefore ease the burden on the Aged Pension.

In this writer's opinion it's one of the smarter superannuation initiatives from Canberra.

It was initially dollar for dollar and then raised to $1.50 per dollar before the Rudd/Gillard Governments started winding it back in their quest for post GFC budget savings.

(Superannuation handouts for the wealthy weren't attacked with quite the same vigour, but that's a story for another day.)

However $500 is still substantial and, according to the latest figures from the Tax Office, around half a million people are taking advantage of the co-contribution.

Many more people though are eligible.

The real benefit of the co-contribution comes from the power of compound interest or, in simple terms, earning interest on interest.

Over a 40-year working life, at a very conservative interest rate of 5 per cent, your thousand dollars, plus the $500 from the Government, will grow to nearly $11,000.

And if, for example, you took advantage of the co-contribution for 10 years, you could be looking at an extra $150-200,000 in your super account and a big boost to your retirement income.

To get the maximum $500, your income must be less than $34,488. Above this threshold the co-contribution starts to reduce, cutting out at an income of $49,488.

For people on low incomes though, finding an extra thousand dollars can be easier said than done.

Deakin University's Senior Lecturer in Financial Planning and Superannuation, Dr Adrian Raftery, suggests saving $20 a week might be a more feasible option than trying to find the money in one hit.

Those who stand to benefit most from the co-contribution are young people, just starting out in the workforce, who have their whole working lives ahead of them.

With no dependants, and probably very few fixed expenses, they're also in an excellent position to be able to afford to put more into super.

But how do you convince a 20-year-old, who can't see past next weekend's party, that one day they'll be old?

According to Dr Raftery, a bigger effort needs to be made to make superannuation more sexy for young people.

Dr Raftery said, if the prospect of hundreds of thousands of extra dollars in retirement income doesn't work, he tells his students to go and talk to their parents.

"What I tell them is to ask Mum and Dad what they would do differently with their finances if they were 20 again, particularly with superannuation."

He said the answer almost every time is, "put extra money in."

Adrian Raftery takes that one step further, saying parents of young adult children should seriously consider giving them the $1,000 they need to attract the Government's $500 co-contribution.

"It's an amazing present that will just keep on giving as that money grows over time."

Dr Raftery points out that, because of the superannuation preservation rules, children can't touch that money till they retire.

And he said parents will win out because their children will be less reliant on them dying so they can get their inheritance!

The biggest winner though will be the public purse if more people become less reliant on the aged pension in retirement.

You can see the full interview with Dr Adrian Raftery on the Finance Quarter this Saturday (February 7) at 9:45pm AEDT on ABC News 24. The Finance Quarter can also be watched by clicking on the Finance Quarter icon on this page.

Original article published on ABC News 6 February 2015

Tags: 101 WaysDeductionsFinancial PlanningPersonal taxSMSFSuper

Author: Andrew Robertson

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