It’s easy when you are juggling day-to-day expenses to push retirement to the back of your mind or tell yourself that you can’t afford to put money aside. However making regular savings, no matter how small, will make a big difference to your future. Remember, the earlier you start the longer your money has to grow.
You may think saving a small amount doesn’t make a difference but you would be surprised.
For example saving $20 per week for 15 years could give you a lump sum in retirement that generates an extra $30 per week for the rest of your life. When you are on a fixed income, $30 a week can make a real difference to your quality of life.
The following table shows the value of regular weekly savings over various time frames:
| Weekly savings | Value after |
|||||
| 5 years | 10 years | 15 years | 20 years | 25 years | 30 years | |
| $20 p/w | $6,400 | $15,400 | $28,000 | $45,600 | $70,400 | $105,000 |
| $30 p/w | $9,600 | $23,100 | $42,000 | $68,400 | $105,600 | $157,500 |
| $40 p/w | $12,800 | $31,800 | $56,000 | $91,200 | $140,800 | $210,000 |
Figures assume return of 7% per annum
No allowance has been made for fees and charges or tax
When investing your ongoing savings, there are many options to choose from. The first decision you need to make is whether to invest in your own name or via a superannuation fund. Many women find superannuation confusing and think it is heavily taxed, yet it is one of the most tax-effective ways to invest.
Superannuation funds only pay tax on their earnings at the rate of 15 per cent whereas if you invest in your own name, you will pay tax at your marginal tax rate (which can be as high as 47 per cent plus the Medicare Levy but in most cases is far less). When you retire, you receive a tax-free lump sum with the balance taxed at 15 per cent plus the Medicare Levy. However, if you learn how to structure your financial affairs correctly, you can further reduce this level of tax.
Money in a superannuation fund cannot be accessed until you retire (except in special circumstances), which helps make sure you don’t spend those savings in the meantime.
If you are employed and earn less than $58,000 per year, you can take advantage of the Federal Government’s Co-contribution Scheme. Under the Scheme, you can receive up to $1.50 for every dollar you contribute from your take-home salary into your superannuation fund (with a maximum of $1,500).
Not surprisingly, 63 per cent of the first round of co-contribution payments was made to women, which is reflective of the number of women working part-time, on a casual rate or in lower paid roles.
Can my spouse contribute to my superannuation fund?
Under current Commonwealth superannuation law, if your assessable income is less than $13,800, your legal or de-facto spouse can contribute up to $3,000 into your superannuation fund and receive a tax rebate of 18 per cent. Your spouse can also make additional contributions into your super fund at any time; however, the tax rebate will not apply.
The Commonwealth is intending to change legislation to allow the splitting of legal and de facto spouse superannuation contributions from
1 July 2006.
Paying money into superannuation out of your before-tax salary is known as salary sacrifice and can be an extremely tax effective way to boost your super if you are on a high marginal tax rate, and your employer agrees. In most cases, you will hardly notice the difference in your take home pay, whilst making a valuable investment in your future.
| Your Marginal Tax Rate Sacrifice | Taken as Salary | Salary Sacrifice |
| 30% | $685 | $850 |
| 42% | $565 | $850 |
| 47% | $515 | $850 |
A 15 per cent contributions tax is paid by the superannuation fund on all salary sacrifice contributions. Even after allowing for this, the amount of tax you pay is far less than if you take the salary as cash. The above table compares the value of $1,000 taken as part of your salary against putting it into your super fund as a salary sacrifice contribution.
If you are self-employed, you can get a full tax deduction on the first $5,000 you contribute to your super fund. A 75 per cent tax deduction will apply on contributions above this amount, subject to maximum allowable age-based limits.
The Federal Government sets limits on the amount you can contribute into superannuation each year that can be claimed as a tax deduction. These amounts increase each year in line with CPI and for the 2005/2006 are as follows:
| Under age 35 | $14,603 |
| Age 35 to 39 | $40,560 |
| Age 50 and over | $100,587 |
The Federal Government also sets limits on how much you can receive out of your superannuation fund without having to pay excess benefits tax. The limits you can receive from your super fund for the 2005/2006 year are $648,946 if you take the superannuation monies as a lump sum or $1,297,886 if you take the monies as a pension.
From 1 July 2005 some employees will be eligible to choose what superannuation fund their employer contributions are paid into. When choosing the right fund, you need to compare fees and charges, investment options and returns and whether insurance cover is offered and how much it costs.
Combining your super funds into one will usually save on fees and charges and make it far easier to manage. However, in situations where you have more than one employer or have a fund with a large exit penalty, you may need to have more than one fund. Make sure you check what is in your best interests.