Less tax today means more money in retirement
Australians are living longer and enjoying better health and quality of life in retirement. That's great news for all of us. But it also means we need more money to live on in retirement. That's where super plays a valuable role. A range of valuable tax concessions apply to all stages of the superannuation cycle - savings that make super the most tax-friendly way to build your wealth for life after work.
In the ‘accumulation phase' when we are building our super savings, contributions made using before-tax money (‘concessional' contributions) are taxed at just 15%. This rate is likely to be much lower than your personal marginal tax rate.
In fact, high income earners can lose up to 45% of every dollar earned to tax, so it makes good financial sense to invest in Superannuation, where 85 cents of every dollar invested goes towards building your nest egg.
If you top up your super from your after-tax income (money you already have in the bank), generally you pay no contributions tax at all.
Lightly taxed investment returns
Investment returns held in super are also lightly taxed. A maximum rate of 15% applies to the investment income earned by your fund (10% on capital gains). It means more of your money goes to work providing for your retirement rather than being lost to tax.
Super - tax free from age 60
When you're ready to retire, your super continues to deliver valuable tax savings. From age 60, your super can be accessed tax-free. You don't even need to include any super drawdowns in your personal tax return.
Case study: For retirement, super wins
Jim enjoys an extra $64,000 in retirement by investing through super
To see just how generous the tax concessions of super can be, let's take a look at how a hypothetical investor - Jim, enjoys an extra $64,000 in retirement simply by investing in super.
Aged 52, Jim earns a salary of 85,000. He has a lump sum of $20,000 to invest, and we'll assume that he opts for an asset outside of super that provides an annual return averaging 7.4% over the next 15 years until Jim retires at age 67. Along with his lump sum, Jim adds an extra $1,000 each month to his investment.
By the time Jim retires, his investment will have grown to $158,000. It's not a bad result- but let's see how this compares to investing in super.
Rather than selecting a non-super investment, Jim adds the $20,000 lump sum to his super fund, which also earns an average return of 7.4% annually. Similarly, he adds an extra $1,000 to his fund each month.
By the time Jim reaches age 67, his initial lump sum and ongoing contributions will have added an extra $222,000 to his final nest egg. That's $64,000 more than if he had invested outside of super - even though the average annual return is the same. And remember, Jim can access his super savings tax-free from age 60.
The $64,000 difference between the two options is a result of the tax savings that super enjoys. Both investments earn a before-tax return of 7.4%p.a. but once tax is taken into account the picture is quite different. The non-super investment offers an after-tax return of just 4.7% compared to an annual after tax return of 6.6% within super.
To find out more
Find financial advice on the tax benefits of super? Need a financial adviser or just want to talk through your options? At BT we can give you general and limited advice on how to invest your super. Or we can help you find a registered financial adviser who can help you with personalized financial advice. Just call us on 1800 104 800 to discover how your choice of investment options could boost the value of your super fund.
Looking for more ways to build your super? Making an active choice between conservative, balanced or growth funds could add more in the long term.
Want a super fund that adds low fees to the long list of super benefits? Pay 45% less than the average personal retail super fund with BT Super for Life - making super simple.
Things you should know
All figures based on retirement at age 65, 9% employer contributions, earnings of 7.4% per year, net of fees and taxes in today's dollars. All other fees and charges ignored except contributions tax of 15%. Pre-tax and after-tax returns are based on the composition of income and capital growth of a balanced return fund. You should consider your personal objectives, financial situation and needs before acting on this information. Past returns are no guarantee of future performance.
All figures are correct as at June 30 2011. Consider your personal objectives, financial situation and needs before acting on the information. Past returns are no guarantee of future performance