Superannuation: a tax effective way to save for retirement

Apart from buying a home, superannuation is likely to be the biggest investment most Australians will make in their lifetime.

It’s also one of the most tax-effective ways to save for retirement. The Government provides tax concessions for superannuation, which include concessional taxation rates for certain contributions, as well as for earnings on investments.

Types of superannuation contributions

There are generally two types of superannuation contributions you can make to super.

Tax effectiveness of superannuation
Contributions

The tax arrangements applying to superannuation contributions broadly depend on the type of contributions made and whether the contribution is within the relevant contribution cap.

Concessional contributions are taxed at 15 per cent in the fund when they are made*. These tax rates are generally less than those that apply on income that is paid to you personally and taxed at individual marginal tax rates.

Non-concessional contributions on the other hand, are not taxable in the fund when they are made.

More information, including the current contribution caps and the treatment of contributions above the caps, can be found on the ATO website.

* An additional 15 per cent tax (known as Division 293 tax) may apply to concessional contributions if your income exceeds a certain threshold.

Tax within your fund

Within your superannuation account, investment income is typically taxed at a maximum rate of 15 per cent, which is generally less than individual marginal tax rates. Once you start a superannuation pension (excluding transition-to-retirement pensions), the investment earnings in your pension account are completely tax free.

Typically, the tax advantages of superannuation help your retirement savings grow faster than they would if held outside super.

Example: Alice’s super savings

Alice is 30 years old and has $5,000 after tax available to save per year. She can choose to invest this inside or outside superannuation. She can also choose how she contributes this money into her superannuation to potentially increase her savings.

The chart below shows three options for Alice to save from age 30 to age 60.

The chart below shows the results of the following scenarios:

1. If Alice contributes $5,000 per year into her superannuation account as a non-concessional contribution, she will have $254,770 at age 60.
2. If Alice invests $5,000 per year outside superannuation, her investment will grow to $222,598 at age 60.
3. If Alice salary sacrifices* the pre-tax equivalent of $5,000 into her superannuation account as a concessional contribution each year, her account balance will grow to $325,681 at age 60.

* Many employers offer salary sacrifice arrangements to their employees. Under these arrangements, employees have the option of forgoing some of their pre-tax salary in return for additional superannuation contributions.

Assumptions

• The earnings rate for each investment is 6.50 per cent per annum and is before tax and net of fees.
• Earnings are made up of 52 per cent income (24 per cent of which is fully franked dividends) and 48 per cent capital growth.
• Alice is currently on the 37 per cent marginal tax rate, reducing to 30 per cent from 2024/25.
• The Medicare levy of 2 per cent applies to the non-super portfolio.
• Income inside super is taxed at 15 per cent.
• Income outside super is taxed at 39 per cent (Alice’s marginal tax rate plus the 2 percent Medicare levy) from 2022/23, reducing to 32 per cent from 2024/25.
• Capital gains qualify for the capital gains tax (CGT) discount (33.33 per cent inside super and 50 per cent outside super).
• All figures (including annual contributions) are in today’s dollars (assuming the consumer price index (CPI) increases at the rate of 2.5 per cent per year).
• Contributions are made evenly throughout each year.