Leonie and Brad both earn $50,000 per year and receive an additional $5,000 bonus from their employer at Christmas time. 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%p.a. and Brad chooses a cash investment portfolio for his superannuation which has an average return of 5%p.a. over the 5 years. Which investment do you think will come out in front after 5 years?

It might seem obvious that Leonie’s higher return will pay off, but let’s take a closer look.

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% contribution tax, leaving him with $4,250 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 5 years of saving Leonie has $19,400 in her bank account and Brad has $24,700 in his superannuation, a difference of more than $5,000! By taking advantage of the favourable tax treatment superannuation enjoys, Brad has made the most of his savings.

MKT/2185/0809

^* Including Medicare levy