See how Brad ended up with $5,000 more than Leonie, who invested in a term deposit.
Leonie and Brad both earn $50,000 per year and receive an additional $5,000 annual bonus from their employer. They want to save their bonus each year for the next five years, to give their retirement savings a boost. Both want to take as little risk with their investment as possible.
Leonie chooses to invest her $5,000 each year in a term deposit account, while Brad decides to invest his $5,000 each year in his superannuation.
Leonie’s term deposit pays 6% per annum and Brad chooses a cash investment portfolio for his super which has an average return of 5% per annum over the five years.
Leonie has to pay 31.5%* income tax on her bonus before she can invest in her term deposit, leaving her with $3,425 to invest. Meanwhile, Brad chooses to contribute his $5,000 to super by salary sacrifice, so he only pays 15% contributions tax, leaving him with $4,250 to invest each year.
Over the years Leonie also has to pay income tax at 31.5% on the interest she earns, while Brad’s superannuation return is already net of tax (at the lower rate of 15%) and fees.
After five years of saving, Leonie has $19,400 in her bank account and Brad has $24,700 in his super – a difference of more than $5,000! By taking advantage of the favourable tax treatment of super, Brad has made the most of his savings.
*including Medicare levy