Time to rethink your super strategy?

July 5, 2017

Imagine you were starting your career all over again. You have your whole working life in front of you. How would you set up your financial affairs? The superannuation system is by far the most attractive tax structure for long-term wealth creation.

When you are building up your superannuation, you can salary sacrifice and pay no more than 15% tax on your income. The earnings on your growing super are taxed at not more than 15%, rather than up to 49%, and capital gains are taxed at 10% rather than up to 23.5%.

Let’s imagine you decided to invest $10,000 a year for the next ten years. The table shows the comparison between salary sacrificing into super and investing it personally at different tax rates.

 

Super

Personal

Personal

Personal

Tax rate

15.0%

34.5%

39.0%

49.0%

Invested after tax

$8,500

$6,550

$6,100

$5,100

Pre-tax earnings

8%

8%

8%

8%

Earnings after tax

6.80%

5.24%

4.88%

4.08%

Wealth after 10 years

$116,336

$83,314

$76,297

$61,459

If you are on the top tax rate, you will have 89% more saved after ten years. And it gets better over time – after 20 years you would have 122% more! There will be no limits on how much you can have in superannuation and no penalty tax rates.

Once you retire after age 60 you can draw on your super either as a pension or by taking lump sums and it will be tax-free. If you leave it to accumulate, the fund will pay tax as described above. If you convert your super to a pension all income and capital gains are tax-free. You have the freedom in how you manage your retirement savings.

Can it really be this good?

There will be times when superannuation may not be the best solution. For instance, your money is locked away until retirement and there are limits on borrowing to invest.

Superannuation rules limit how much can be contributed tax-effectively to super:

After-tax (undeducted) contributions

  • Limited to $180,000 (indexed) per person per year.

Pre-tax contributions

  • Limited to $30,000 per year for those aged under 49; and $35,000 per year for people 49 and over.

Over the long term, these rules may actually make super simpler, but in the meantime, it is a good idea to get assistance in stepping through the current maze of rules.

Note: Tax rates include 2% Medicare Levy and 2% Temporary Budget Repair Levy for taxable incomes over $180,000 p.a.

For more information, contact us at Leenane Tempelton on 02 4926 2300 or email success@leenanetempleton.com.au

 

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