For many people, superannuation is one of the best ways to accumulate wealth. The Government provides tax benefits to encourage people to fund their own retirement via superannuation. With more Australians living longer, you may spend more time in retirement than you will be working, which is good, so long as you’ve got the income!
What is superannuation?
While superannuation offers one of the biggest opportunities to secure your financial future, it really is just another form of savings. The main differences are that you:
- may be able to receive some powerful tax benefits on your superannuation money, and
- you usually cannot access the money until you retire.
There are various ways to accumulate money in superannuation:
- If you’re employed, your employer will generally make some superannuation contributions for you each year, based on your salary.
- You can also make personal contributions if you choose to, from either your:
- Before-tax salary (like salary sacrifice contributions by arranging with your employer to pay some of your salaries into your superannuation), or
- After-tax salary (this type of personal contribution may entitle you for an additional Government co-contribution).
- Your spouse may contribute to your superannuation on your behalf too (and then may be eligible for the spouse contribution offset) or split their contributions with you.
Why use superannuation to save for retirement?
With an aging population and our average life expectancy increasing, it’s now unlikely that the Government will be able to adequately provide for everyone in retirement.
But even if the Government can, ask yourself if you would like to live on social security. Currently, the maximum payment you can receive in retirement is $14,970 per annum for a single person and $24,903 per annum for a married couple.
Social Security amounts are effective from 20 March 2009 and include the pharmaceutical allowance.
Why superannuation can be important
Tax benefits available from superannuation can impact on how long your money will last in retirement. Put simply, these benefits mean that money invested in superannuation may last many years longer for you in retirement than if it was invested in the same way, outside superannuation.
Consider the chart below. It shows the value of investments made in superannuation (the orange line), versus the same investments made outside the superannuation environment (the blue line). The results are very compelling. Rather than the investment income running out by age 74, tax benefits available from investing in superannuation means there is income to live on for an extra eight years in retirement. Given you’re likely to live past 80, you’re probably going to need it.
Value of $5,000 pa (indexed), salary sacrificed into superannuation or invested outside superannuation until age 65. This chart is for illustrative purposes only and is based on assumptions. A change to one or more of the assumptions and your personal circumstances will produce different results.
This chart illustrates the difference in investing in superannuation and outside superannuation using the following assumptions:
- from age 26 to age 65, the investor uses $5,000 of pre-tax salary, indexed to inflation at 3% pa to either make a salary sacrifice contribution to superannuation, without exceeding the concessional contribution cap or invests outside superannuation after paying income tax.
- From age 65, the investor receives a retirement income of $30,000 pa after tax, indexed to inflation at 3%. This retirement income is paid as a pension from superannuation and from income returns and the realisation of assets, if necessary, outside superannuation.
- Both investments inside and outside superannuation earn a return of 7.7% pa net of fees but before taxes. Outside superannuation, the investor is taxed on income returns and any capital gains from the realisation of assets to fund their retirement income at the marginal tax rate of 31.5%. Superannuation earnings are taxed at 15% and from age 65 when the member commences their pension, no tax is paid on the superannuation earnings or on the pension payments.