In the past couple of months I have been met with much criticism and confusion about my zealous love for superannuation. To explain: First of all, I work in the superannuation industry and know the laws and strategies inside and out. Second, I have done some in depth analysis and made some startling realisations which have swayed my own investment decisions.
To clarify on my previous article. Let’s assume you’re in the 30% tax bracket (between $37,000 and $80,000) this means that for every dollar after $37,000 that you earn, the tax man will take 30% tax as well as an addition 1.5% in Medicare Levy, as such you’re effectively paying 31.5% in tax. If you were to “sacrifice” this income into superannuation it would only be tax at 15%. So already by electing to save for your retirement over saving money in your own name you’ve saved 16.5% in tax, which is effectively the save as making a 16.5% return on your investment.
To illustrate, imagine you want to save $1,000 of your gross before tax salary; you can either invest it in superannuation or invest it in your own personal name. If you were to save this $1,000 in your own name, the tax man would want his cut and would take $315, leaving you with only $685 to invest. If you instead chose to put this money into superannuation, the tax man would cut you some slack and he would only take $150, leaving you with a much more attractive $850 to invest.
What compounds this paradox is that the tax man also wants to get his hands on the money that these two investments earn. So assuming a very conservative 6% return, the tax man would want 31.5% of this money if it’s in your own name. If its in superannuation its only going to get taxed at 15%. What this does (as discussed yesterday) is reduce your effective interest rate down to 4.11% in your own name and 5.10% in superannuation. Now 0.99% doesn’t seem like much on the face of it, but over a 45 year working lifetime that gross $1,000 that we invested each year at 6% results in a difference between $85,429.36 in our own name or $139,637.65 in superannuation; that’s a 63.45% difference. What frightens me is that if you increase the investment return to 10% the difference between the two over 45 years is whopping 104.59%.
Now this isn’t to say that superannuation doesn’t have its risks; just like every other investment. As my mother cautions the biggest risk is legislative risk; where those mugs in Canberra might decide to change the superannuation rules (again). As it stands however, salary sacrifice looks pretty good at the moment. But I’d contact an account or financial advisor before implementing a strategy because there are plenty of other considerations that need to be taken into account.
Chris Hooper
(Shutup and Save)