Paying just 15% contribution tax instead of your marginal tax rate sounds like a generous incentive to save for your retirement in a superannuation fund. Looking more closely however, might you be better off paying full income tax, and not losing control of your own money?
- Contribution tax payments are not refundable if for any reason your fund loses money. The average self managed super fund account balance at retirement is about $660,000, and if there was a 40% draw-back as occurred in the wake of the GFC, you could lose as much as $264,000, including the contribution tax you had pre-paid.
- The government has immediate use of the tax it raises from super, before its value is depreciated by time, whereas you do not have access to your money until years later when its value has been significantly eroded by inflation.
- Another factor to consider is the misleading use of the marginal tax rate instead of the average tax paid based on the actual dollar amount of income tax. Marginal tax rates refer only to the top tax rate you will pay on your income, after being initially taxed at a lower rate.
Three examples illustrate the difference this makes in working out the tax-effectiveness of superannuation. One is based on average weekly earnings with a marginal tax rate at present at 32.5%, another on an income of $90,000 at a current marginal tax rate of 37%, and lastly on an income of $180,000, also at a marginal tax rate of 37% planned to be reduced to 32.5%.
1 Taxable Income of $61,958
The average weekly wage as of Jan 2018 was $1191.50 or an annual salary of $61,958. If this amount was contributed to super over a period of time, the contributions tax would be $9293.70 (15%)
On the other hand, if you were to pay income tax on this amount, you would pay:
Between $1 and $18,200, Nil;
Between $18,200 and $37,000, @ 19 cents per dollar, $3572;
Between $37,001 and $87,000, @ 32.5 cents per dollar, $8,111.
Total Income Tax $11, 683. plus Medicare Levy $1239. Total tax $12,922 Average Tax Rate 21%
2 Taxable Income of $90,000
Superannuation tax $ 13,500 (15%) Income tax $20,932, plus Medicare Levy of $1800 $ 22,732 Average tax rate 25%
3 Taxable Income of $180,000
Superannuation tax $ 27,000 (15%)
Income Tax $ 54,232, Medicare Levy $ 3,600,
Total tax $57,832 Average tax rate 32%
With higher taxable incomes, superfunds save more tax, but once the $250,000 threshold is exceeded the superannuation tax-rate jumps by another 15% to 30%.
Governments have to fund the escalating cost of aged and health care, including the pension safety net, but their priorities are such that whereas politicians and public servants enjoy near full funding of their superannuation entitlements, all other Australians do not.
I closed our self-managed superannuation fund about 4 years ago, after nearly two decades, to simplify our finances. I write only from experience, not qualification. So many have lost so much of their super savings, it is worth considering alternative options with the advice of a qualified financial adviser.
Whilst superannuation remains a preferred vehicle to save for retirement, it comes with high costs, and significant risk, including the risk of not reaching retirement age. There is also the ever-present anxiety for retirees, that the government of the day will change the rules, and plunder what we have saved for our own needs, when we are living longer, not theirs.