Superannuation Discussion + market volatility

[Deleted member 29185]

Even more impressive, he retired 37 years ago!

I'd love to do that, but my golfing handicap is actually ... me!

 

[JohnK]

Don't sell yourself short. My 95 year old grandfather still plays 18 holes, twice a week, off a handicap of 22. He's done that since he retired in 1980 (27 years ago) (the handicap has crept up a bit over the years).

That's fantastic. We have/had a few at our golf club playing into their 90's.

My number 1 goal in life was/is to live to 100 years old and nothing more special than to play golf on my 100th birthday.

Now that I have a daughter I would love to get to their age even more to see her grow up and achieve what I couldn't in life and that is to help people overcome immune system issues. I know there are bad illnesses around but for the body to destroy itself from inside is difficult to comprehend and accept.

 

[JohnK]

I'm still trying to work out the calculation for voluntary superannuation contributions.

If I salary sacrifice $15,000/year into superannuation and assuming I'm in the 40% tax bracket then I get a tax deduction of $6,000? Understand that I also need to pay 15% contribution tax.

If I deposit $15,000 post tax dollars into superannuation then I still only get $6,000 tax deduction or do I get a tax deduction of $10,000 on the original pre-tax dollars?

It would seem that voluntary contributions are severely disadvantaged over salary sacrifice? Only 32 weeks left this financial year and want to contribute as close as possible to $25,000 into superannuation this year.

 

[dec540]

I'm still trying to work out the calculation for voluntary superannuation contributions.

If I salary sacrifice $15,000/year into superannuation and assuming I'm in the 40% tax bracket then I get a tax deduction of $6,000? Understand that I also need to pay 15% contribution tax.

If I deposit $15,000 post tax dollars into superannuation then I still only get $6,000 tax deduction or do I get a tax deduction of $10,000 on the original pre-tax dollars?

It would seem that voluntary contributions are severely disadvantaged over salary sacrifice? Only 32 weeks left this financial year and want to contribute as close as possible to $25,000 into superannuation this year.

This comparison might help. I think you may be getting tax deductions and a tax reduction mixed up.

Gross Income $15,000
Deductible Contribution $15,000
Taxable Income $0
Tax Payable (40%) $0
Contributions tax (15%) $2,250

Gross Income $15,000
Non-deductible Contribution $15,000
Taxable Income $15,000
Tax Payable (40%) $6,000
Contributions tax (15%) N/A

Note, I haven't added your actual income to this, I've just used the marginal income of $15,000, so it's assumed that the entire amount would be assessed under the 40% Marginal Tax Rate.

Essentially you either pay tax at your marginal tax rate, or you pay contribution tax within the super fund. Now keep in mind the contribution caps for 'deductible contributions' (e.g. Super Guarantee, Salary Sacrifice, Personal Contributions which you then lodge a 'notice of intent to claim a tax deduction form for') are limited to $25,000 p.a., whereas after tax contributions have a cap of $100,000 p.a..

Feel free to PM me if you need a quick 2 minute chat to work through this.

Note: Not trying to provide advice, just a factual example based on the information provided

 

[JohnK]

Note: Not trying to provide advice, just a factual example based on the information provided

Not asking for advice. Just trying to workout how to maximise my superannuation and I'm struggling with the calculation.

If believe my superannuation guarantee contribution is ~$10,000/year which leaves me $15,000/year to remain within the yearly $25,000 threshold. I am on 40% marginal rate.

If I salary sacrifice $15,000 I save $6,000 income tax that would have been paid but pay $2,250 contributions tax. The net saving to me is $3,750/year but the net effect on the superannuation balance is ($15,000 - $2,250) $12,750?

I don't want to go over the $25,000/year threshold. What is the calculation for perceived savings topping up $15,000 post tax dollars into superannuation?

To me it feels like salary sacrifice wins hands down.

 

[dec540]

Not asking for advice. Just trying to workout how to maximise my superannuation and I'm struggling with the calculation.

If believe my superannuation guarantee contribution is ~$10,000/year which leaves me $15,000/year to remain within the yearly $25,000 threshold. I am on 40% marginal rate.

If I salary sacrifice $15,000 I save $6,000 income tax that would have been paid but pay $2,250 contributions tax. The next saving to me is $3,750/year but the net effect on the superannuation balance is ($15,000 - $2,250) $12,750?

I don't want to go over the $25,000/year threshold. What is the calculation for perceived savings topping up $15,000 post tax dollars into superannuation?

To me it feels like salary sactifice wins hands down.

I know you're not asking for advice, it's just the standard a$$ covering, because we live in a society where someone would otherwise come back and say "You didn't tell me that if I salary sacrificed $15,000 to super I wouldn't be able to afford my mortgage repayments...." - again, I know this isn't what you're likely to do, we just have to put some sort of disclaimer in.

I agree with your calculations, and yes, generally speaking, there'd be no benefit to making post tax contributions when someone can instead make pre-tax contributions.

The perceived value in topping up with post tax funds (after maxing out the pre-tax cap) is that the funds are invested in an environment where the maximum tax rate is 15%, as opposed to your current marginal tax rate which you've stated is 40%, so you're getting the compound growth on 85% of the earnings each year as opposed to 60% (franking credits, capital gains etc. aside). Plus the 'forced' retirement savings, i.e. you can't access the funds until retirement (again, speaking generally here) so you know it won't be used for something else along the way, taking away from your lifestyle in retirement.

I hope that makes sense

 

[travelislife]

I'm still trying to work out the calculation for voluntary superannuation contributions.

If I salary sacrifice $15,000/year into superannuation and assuming I'm in the 40% tax bracket then I get a tax deduction of $6,000? Understand that I also need to pay 15% contribution tax.

If I deposit $15,000 post tax dollars into superannuation then I still only get $6,000 tax deduction or do I get a tax deduction of $10,000 on the original pre-tax dollars?

It would seem that voluntary contributions are severely disadvantaged over salary sacrifice? Only 32 weeks left this financial year and want to contribute as close as possible to $25,000 into superannuation this year.

Practically there is no difference between the two in the end result. You will get the same amount in your super account, the same income, the same tax. The only difference is that in one scenario you are paying it in (the new change) vs your employer paying it in. Gives the employee more control and removes the risk of unpaid super which is a massive problem in Australia, especially with smaller to mid size businesses where businesses hold on to the super to help with cashflow, even though it will be showing up on employee pay slips.

 

[travelislife]

Not asking for advice. Just trying to workout how to maximise my superannuation and I'm struggling with the calculation.

If believe my superannuation guarantee contribution is ~$10,000/year which leaves me $15,000/year to remain within the yearly $25,000 threshold. I am on 40% marginal rate.

If I salary sacrifice $15,000 I save $6,000 income tax that would have been paid but pay $2,250 contributions tax. The net saving to me is $3,750/year but the net effect on the superannuation balance is ($15,000 - $2,250) $12,750?

I don't want to go over the $25,000/year threshold. What is the calculation for perceived savings topping up $15,000 post tax dollars into superannuation?

To me it feels like salary sacrifice wins hands down.

The end effect is identical. So not sure why you say ‘salary sacrifice wins hands down.’

As long as we are talking only up to the $25k cap which you have stated we are then the end result is the same regardless if you put the $15k in after tax (you get to reduce your income by that amount at tax time and thus get the tax back) or if the $15k gets put in pre tax.

It is the whole reason they have changed the rules as of 1st of July to give everyone the same opportunity and not be beholden to their employer.

 

[craven morehead]

Late to the party , a must read for another SMSF operator

 

[cove]

With the new limits to superannuation contributions from salary sacrificing it will be more difficult to achieve a $1.6 million retirement nest egg. I think it is important to read your superannuation statement and consider your investment mix.
Now that $1.6 million is purely a Government selected figure where beyond that figure there can be further taxes to be paid.
Making progress on your home mortgage while interest rates are low is the other way to improve your retirement circumstances.

 

[dec540]

The end effect is identical. So not sure why you say ‘salary sacrifice wins hands down.’

As long as we are talking only up to the $25k cap which you have stated we are then the end result is the same regardless if you put the $15k in after tax (you get to reduce your income by that amount at tax time and thus get the tax back) or if the $15k gets put in pre tax.

It is the whole reason they have changed the rules as of 1st of July to give everyone the same opportunity and not be beholden to their employer.

Whilst, technically correct, you're missing a crucial piece of information here. Your statement is only true if the contributor completes and submits a 'Notice of intent to claim or vary a deduction for personal super contributions' form and submits this to their superannuation fund.

The key issue is that the superannuation fund needs to deduct contributions tax prior to the individual being able to claim a tax deduction in their personal tax return.

Another point to note is that when salary sacrificing, you effectively receive the tax benefit straight away, whereas making a personal after tax contribution then claiming a tax deduction requires you to lodge your tax return before you will receive the tax benefit.

 

[travelislife]

Whilst, technically correct, you're missing a crucial piece of information here. Your statement is only true if the contributor completes and submits a 'Notice of intent to claim or vary a deduction for personal super contributions' form and submits this to their superannuation fund.

The key issue is that the superannuation fund needs to deduct contributions tax prior to the individual being able to claim a tax deduction in their personal tax return.

Another point to note is that when salary sacrificing, you effectively receive the tax benefit straight away, whereas making a personal after tax contribution then claiming a tax deduction requires you to lodge your tax return before you will receive the tax benefit.

Agree with everything you said. And it doesn’t contradict anything I said, I.e. the end result is the same.

 

[JohnK]

The end effect is identical. So not sure why you say ‘salary sacrifice wins hands down.’

I did say I was struggling with the calculation but think I have worked it out now.

Salary sacrificing could be more beneficial as the payments are spread through out the year and assuming positive returns the funds are working in your favour at increasing the superannuation balance.

I should salary sacrifice the $15,000 in the next 7 months for this financial year and then spread out over 12 months from next year.

 

[QF WP]

Something else that everyone can receive (for better or worse, depending on the markets) is dollar cost averaging. In a volatile market, you can average down your average buy in unit price in your investment options over time, however if the markets are only going up, then the average could be going up. A simple example to illustrate the benefits: http://www.smartretirement.com.au/wp-content/uploads/2015/06/Dollar-Cost-Averaging-Blackrock.pdf

 

[rogerkambah]

Unfortunately this doesn't take into consideration the cost of brokerage.
Brokerage on $1000 of shares as a single transaction is $10, whereas brokerage on 10 transactions at $100 each is $100 so the average cost of the shares is raised, often substantially.

Something else that everyone can receive (for better or worse, depending on the markets) is dollar cost averaging. In a volatile market, you can average down your average buy in unit price in your investment options over time, however if the markets are only going up, then the average could be going up. A simple example to illustrate the benefits: http://www.smartretirement.com.au/wp-content/uploads/2015/06/Dollar-Cost-Averaging-Blackrock.pdf

 

[Blinky]

I haven't read this whole thread, so don't know if this has been covered. I'm 66, still working, but as a baby boomer, didn't receive any superannuation for about the first 20 years of my working like. My wife and I have around $500,000 in super and we will be eligible for a fair proportion of the age pension.

There is a little known program called the Age Pension Loan (run through Centrelink) where you can convert the part pension to a full pension. It works as a sort of reverse mortgage at about 5% by memory. In our situation we can purchase about $10k extra pension at a cost of $11k against our home equity.

It seems we are better off than those with $800k super without access to the pension. We will be able to retire on $60k per annum.

For those in a similar position to me, the Age Pension Loan is worth checking out.

For those experts here, am I missing anything?

 

[cove]

Thanks for your post Blinky. I think I have a relative who might be able to do this.

 

[QF WP]

Ah yes the Age Pension Loan Scheme - yes, a reverse mortgage which can, in certain circumstances, be beneficial. More details here:
Pension Loans Scheme - Australian Government Department of Human Services

 

[Blinky]

Thanks. It will certainly prove beneficial to us. The equity in our house has, like everyone else's, has been rocketing. Even if this growth slows down, there will still be enough left over to take care of our nursing home costs when that dreaded day comes. As I said earlier, we seem to be in the sweet spot with enough super to be able to top up an aged pension, but without having enough to cut out the pension. I really feel sorry for a couple with $800k in super.

 

[lovetravellingoz]

Thanks. It will certainly prove beneficial to us. The equity in our house has, like everyone else's, has been rocketing. Even if this growth slows down, there will still be enough left over to take care of our nursing home costs when that dreaded day comes. As I said earlier, we seem to be in the sweet spot with enough super to be able to top up an aged pension, but without having enough to cut out the pension. I really feel sorry for a couple with $800k in super.

You means the ones with the new boat, new car, fresh back from two RTW trips who have $500K in super.....