The Effects of Taxation

• When you earn interest – it is seen as income. Therefore it is subject to normal income tax regulations.

• If you are setting up an allocated pension by using an annuity – then the rules change and there are many ways in which you can actually minimise the tax payable.

• We will investigate basic scenarios.

Bob saves $2000 per month and deposits this into an annuity that pays 7.2% p.a compounding monthly. If his tax rate is 42% demonstrate how much tax Bob will have to pay each year.

N =

I% =

PV =

Pmt =

FV =

P/Y =

C/Y =

1 x 12

7.2

0

-2000

?

12

12

After 1 yr he has saved : $24808.06

But he must pay tax on the interest earnt :

24808.06 – (12 x 2000) = 808.06

So : 808.06 x 0.42 = $399.38

So Bob needs to take into account that he really will only have :

24808.06 – 399.38 = $24408.68 saved

Superannuation

• Superannuation is money that you are able to spend when you retire.

• There are many regulations on when you can spend the money – but basically you can’t use it until you retire.

• There are many tax advantages in super.• The money is meant to last you for the rest of your

life.• By law – your employer has to put in 9% of your

wage.• You will need to add more yourself if you want to

have enough money to retire on.

• A super question starts as a Future Value question – as the lump sum of money exists in the future – you are saving up for money when you retire.

• Then, when you do retire – it turns into a Present Value question – as the lump sum of money exists now and you will draw money out at regular intervals to live on.

• Be sure that you READ the question carefully and answer in the correct manner.

• Use the flow chart.

How Much Do You Need?

• Food• Travel• Car• Bills• Petrol• Spending

• $5200• $10,000• $10,000• $7500• $2600• $5000

$3358 per month

So assume that you retire at 60 and expect to live for another 25 years. You want monthly payments and the rate you can get is 3.4% p.a. compounding monthly what Lump Sum do you need now? $678005.14

If inflation averages out for this time at 4% per year – what should you be getting each month?

$8951.88

So, how much do you need to have saved?$1,807,451.08

Assumptions• Rates stay the same• Inflation is steady• Bank fees and charges• Tax• Dual incomes• Owning everything when you retire – no debt.• Health