Members of the Public Sector Superannuation Scheme (PSS) face unique challenges when their total superannuation balance (TSB) exceeds the $2 million threshold. This is particularly the case in relation to non-concessional contributions (NCCs). Once your TSB surpasses the $2million limit, your NCC cap becomes $0. This effectively disqualifies you from making further NCCs without incurring substantial penalty tax. NCCs include member contributions if you make them into the fund.
However, there are several strategies to consider and Milestone can help you decide which is the best option for your circumstances.
Understanding the Non-Concessional Contributions Cap
Non-concessional contributions are after-tax contributions made to your superannuation fund. For the 2025-36 financial year, the NCC cap is set at $120,000. If your TSB exceeds $2 million at the end of the previous financial year, your NCC cap becomes $0. This means you cannot make any further NCCs without incurring penalty tax.
Consequences of Exceeding the NCC Cap
Exceeding the NCC cap results in the excess amount being subject to an additional tax rate of 45% plus Medicare levy. Before this tax is applied, the Australian Taxation Office (ATO) will offer you the option to withdraw the excess contributions, along with 85% of any associated earnings, to avoid the tax. If you choose not to withdraw the excess, the amount will remain in your superannuation fund and be taxed accordingly. Paying an additional tax at the top marginal rate on contributions that have already been taxed as part of your salary, is a difficult outcome to accept.
Drawbacks of Ceasing Member Contributions to the PSS
You can cease making member contributions to the PSS once your TSB reaches $2 million. While this approach may seem straightforward, it comes with several potential drawbacks:
- Loss of Employer Contributions: In the PSS, employer contributions are based on your member contributions. By ceasing your contributions, you may reduce or eliminate the employer’s matching contributions, potentially impacting your overall superannuation balance.
- Impact on Accrued Benefit Multiple (ABM): The ABM determines your final retirement benefit. It is influenced by your contribution rate and length of service. Reducing or ceasing contributions may affect the growth of your ABM, potentially leading to a lower retirement benefit.
- Potential for Reduced Retirement Income: By ceasing contributions, you may miss out on the opportunity to increase your superannuation balance through both personal and employer contributions, potentially resulting in a lower retirement income.
The choices available to PSS members are complex. Members who have not yet reached the TSB limit can employ strategies which can avoid this difficult decision, but early action is crucial. For those who have achieved this milestone and are unprepared for it, careful consideration of the pros and cons of continuing to make contributions in excess of the cap is essential. Milestone is able to assist to ensure you maximise the benefits of membership in this generous scheme.
Written by
Andrew Boulds
CFP® BSc. (Hons.) MAppFin | CERTIFIED FINANCIAL PLANNER® Professional