Prepare for retirement by boosting your superannuation
Superannuation is designed to ensure you have an adequate source of income during your retirement.
Superannuation in Australia is governed by a complex system of rules, regulations and taxation policies which can make it seem quite confusing.
For many Australians, Superannuation will be the best and most tax efficient investment they make during their lifetime.
Superannuation has been specifically designed by the Australian Government as its preferred way for you to save for your retirement, with added tax benefits that make it particularly attractive.
Tax rates on contributions, the income earned and the eventual income stream are generally lower than a person’s tax rate if you were to invest outside of superannuation.
As it is intended as a retirement income stream, your superannuation savings are preserved, meaning you can’t access the money unless certain criteria of release are met (i.e. when you are permanently retired).
There are restrictions on the amount of contributions that can be made to superannuation in any financial year and the penalty for exceeding those contribution limits can be harsh.
Your financial adviser can help you consider whether your existing superannuation fund suits your long term goals or if there are better alternatives, while taking into account:
- How much you will need at retirement
- Your investment options (and whether they suit you)
- How to best contribute to your Super to achieve your retirement income goal
- Fees and charges
Superannuation is a key way to fund your lifestyle after you stop working, so it’s important to make sure you’ll have enough stored up. Most employees are with a super fund where their employer pays Super Guarantee Contributions (SGC), with 9.5% of their salary being paid into their super account. You can do your bit to grow your super while you’re still working with a number of tax effective strategies:
- Salary sacrifice
- Make after tax super contributions
- Government co-contribution
- Contribution splitting
- Personal deductible contributions
- Spouse contributions
William, aged 45, was recently promoted and received a pay rise of $5,000, bringing his total salary to $100,000 p.a. Most of his mortgage is paid off and he plans to retire in 20 years. He wants to use his pay rise to boost his retirement savings.
After speaking to a financial adviser, he decides to sacrifice the extra $5,000 into super each year. By using this strategy, he’ll save on tax and get to invest an extra $1,200 each year, compared to receiving the $5,000 as after-tax salary and investing outside super.
|Per year||Receive pay rise as after-tax salary||Sacrifice pay rise into super|
|Additional amount to invest||$1,200|
|Pre-tax pay rise||$5,000||$5,000|
|Less income tax at 39%||($1,950)||(N/A)|
|Less contributions tax 15%||(N/A)||$750|
|Net amount to invest||$3,050||$4,250|
William’s adviser also explains that salary sacrifice can be particularly powerful if done over long time periods. For example, if William salary sacrifices $5,000 p.a. in pre-tax salary for the next 20 years, he could have an extra $55,964 for his retirement.
This is because, in addition to making a larger after-tax investment each year, earnings in a super fund are taxed at a maximum rate of 15%, not his marginal rate of 39% including the Medicare Levy.
The benefits of salary sacrifice over 20 years
Note: William will pay no lump sum tax on his super benefit in 20 years, as he will be over age 60.
1 The 2014/15 personal tax rates are used and includes Medicare levy.
Assumptions: A 20 year comparison based on $5,000 p.a. of pre-tax salary. Both the super and non-super investments earn a total return of 7.7% p.a. (split 3.3% income and 4.4% growth). Investment income is franked at 30%. All investment income is reinvested. Both investments are cashed out at the end of the 20 year period. All figures are after income tax (at 15% in super and 39% inclusive of Medicare outside super) and capital gains tax (including discounting). These rates are assumed to remain constant over the investment period. William’s salary of $100,000 p.a. isn’t indexed.
Talk to an Elders professional about your superannuation options.