Ask the Expert: Super or savings? The salary sacrifice equation
Question 1
Hi Craig, I was going to salary sacrifice $200 a week into super, but after fees I may get $80 to $100 of that. So wouldn’t I be better off putting that $200 into a savings account and don’t touch it, or is there a better way?
Hello,
That does not sound correct. Let’s clarify a few things:
- Super funds should not have any entry fees
- There may be ongoing costs, depending on your fund and what types of investments you are in. This should be less than 1 per cent. And remember it’s the after-fee (net) return that should be your focus.
- Contributions tax of 15 per cent is applied. However, when you salary sacrifice, you avoid paying income tax on that money.
For example, if you earn between $45,000 and $135,000 a year you pay income tax and Medicare levy of 32 per cent (refer to table below).
Option 1 – pay income tax and invest in a savings account: $200 less $64 = $136 going into your account.
Option 2 – salary sacrifice into super less contributions tax. $200 less $30 = $170 going into super.
In just one week you are already $34 ahead. Then any earnings in your savings account is taxed at 32 per cent, but your earnings in super is taxed at only 15 per cent, making the difference even bigger.
Do this week after week and you start to see the huge tax advantage super has.
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Then, when you retire after age 60, all earnings and payments from super are tax-free. It’s an extremely generous tax setting. You should make the most of it.
Question 2
Hey Craig, thank you for your weekly article.
At some point in the future I will receive an inheritance. I plan to give part of that inheritance to my children – or would they be better off to directly inherit that amount? What are the tax implications of both options?
Regards, Alan
Hey Alan,
Generally, you would be better off to receive it.
However, it depends on the asset being inherited and any tax or Centrelink implications.
For bank accounts and cash, there are no tax implications. Similarly, if you inherited someone’s main residence and sold it within two years, there is also no tax.
For other investments, like shares and investment properties, you not only inherit the assets but the underlying cost base. And capital gains tax may be payable once you sell or even give away these assets.
For example, if you inherit some shares, sell them and give the proceeds to another family members, you will still be liable for any CGT that arose from the time they were originally acquired by the deceased and from when you sold them.
If you are in receipt of any Centrelink benefits, an inheritance may affect your payments – even if you immediately gave the funds away.
Centrelink would treat that as a gift and still count any gifts above $10,000 for the next five years. If your children directly received their inheritance, then this would not apply.
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As there are many things to consider, the person making their will should seek legal advice.
Question 3
Hello, I read your column regularly and have a question.
I notice that to gain a full age pension for my wife and myself, our assets need to be less than $470,ooo. We receive a partial pension now, but wonder why.
I receive a Defence Forces Retirement and Death Benefits (DFRDB) pension (Comm Super) and also have $293,000 in Colonial First State in a pension setting.
We have a very good financial manager who has helped me since before I left work with salary sacrificing and pre retirement.
I am 75 (76 in May) and my wife is 77. Our assets include $170,000 in term and bank accounts, plus a vehicle. We own our home with no mortgage.
Just Interested in your opinion.
Ted.
Hi Ted,
You are correct in that a homeowner couple can have other assets up to $470,000 without losing any age pension.
First, check with Centrelink that it has your current balances.
However, a large part of your DFRDB pension would be income-tested and I suspect this is why you receive only a partial age pension. CSC (Comm super) can confirm the amount that is assessed for Centrelink purposes.
A couple can receive $372 a fortnight before being impacted by the income test.
Craig Sankey is a licensed financial adviser and head of Technical Services and Advice Enablement at Industry Fund Services.
Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.
Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.
