What is the Real Benefit of Superannuation?

As mentioned in a previous newsletter only 17% of the population ever gets financial advice. It is this very reason why Superannuation is so misunderstood.

Who would agree that the larger the return your superannuation achieves each year the better off you would be?

Would be surprised to know that you are wrong?

Superannuation is not all about the yearly return or even the long-term return.

The real benefit of superannuation is taxation.

Your superannuation fund is a trust, which is subject to a very low tax rate. Tax on superannuation is 15% during accumulation phase and nil once you are in account based pension phase. 

The trade off for this low tax rate is restricted access to your money until you reach retirement age.

If your average tax rate (tax paid / gross income) is above 15%, then superannuation is the very first stop to making money.

If you have surplus money to invest, by investing in superannuation you are already receiving a better return than outside simply due to the lower tax rate. 

Keep in mind that you can invest in the same type of investment both inside and outside of superannuation.

Example:

You have an average tax rate of 30% and surplus gross income (before tax) of $10,000pa to invest and expect to receive 10%pa return.

Based on this example for your investment outside of super to keep up with your investment inside of super it would need to return 33.5%pa. This is all because of the lower tax rate applied to superannuation.

If we extrapolate this out over 25 years the value of the investment will be:

  1. Outside Super   -$688,000 or income of $64,000 pa for 25 years
  2. Inside Super       - $835,000 or income of $78,000 pa for 25 years

The difference of $147,000 is purely because of tax savings. 

My point is that it is not all about the return on the investment.

Work smarter not harder. 

Having limited access to the funds turns many people off superannuation. However, the real issue is why are you investing. Investing or saving is for one purpose, to allow you to stop working.

For most people this will happen when you turn 65 and retire. Until then, you are paying of the house and raising kids. 

Having the money invested through super not only ensures that you do not spend it until retirement but gives you extra money for no extra effort. 

The real benefit of superannuation is taxation.

For more information on Superannuation give us a call on (07) 4771 4577.