Life Stages > Women saving at work

Women saving at work

Ten years ago Ann & Kiri were trying to decide whether to join their company super scheme. The company subsidises the scheme, paying the fees and adding in some extra money alongside the employees' contributions.

Ann joined, and got the benefits of the employer subsidy. Kiri decided not to because she was unsure how long she would stay with the firm, and she knew that she would only get the full employer subsidy after 5 years.

They both saved $40 per week but Kiri invested direct with a fund manager and paid administration fees and expenses. With the employer subsidy Ann has effectively been saving $80 a week for 10 years. While the income tax on her earnings in the superannuation fund is at a higher rate than Kiri’s, this is more than offset by the employer subsidy and much lower administration costs.

If Ann left this job now she knows she would get around $39,400 which she would transfer into another retirement savings scheme. She has also had subsidised medical insurance through the scheme and this has been very valuable to her on two occasions.

For the same level of savings Kiri has built up a total savings of $24,200. Kiri now realises the real value of an employer subsidy. She now knows that even if she had only stayed in the job for 3 or 4 years she would have been much better off if she had been in the company scheme.

The table below shows the value of Ann's savings (broken down to show her own contribution and the contribution her employer has made) and Kiri (who did not join).

Years Ann Kiri's
Private Saving
Employee Contribution Employer Contribution Total
1 2,100 300 2,400 2,100
2 4,300 1,100 5,400 4,300
3 6,500 2,600 9,100 6,500
4 8,800 4,600 13,400 8,800
5 11,200 7,300 18,500 11,200
6 13,700 8,800 22,500 13,700
7 16,200 10,400 26,500 16,200
8 18,800 11,900 30,700 18,800
9 21,500 13,600 35,000 21,400
10 24,200 15,200 39,400 24,200

Here are the mathematical assumptions behind this story:

  1. The employer contributes the same as the employee to the super scheme. For the employer scheme, the gross return is 7.5%, tax is 33%, inflation is 2.0% and fees are 0.5% (to be paid by the employer). So the real rate of return before fees is around 3.0% and 2.5% after fees.
  2. For Kiri’s individual scheme, the gross return is 7.5%, the marginal tax rate is 19.5%, inflation is 2% and fees are 1.0%. The real rate of return after fees is around 3.0%.
  3. The employer scheme has a vesting scale of 20% per year. This means that after one year the employee is entitled to 20% of the value of the employer account, after two years 40% etc and after five years 100%.
Glossary: earnings
This is the money you receive from others, as payment for the use of your money.
Glossary: inflation
Inflation - is the rate at which the prices of goods and services increase over time. The effect of this is to reduce the purchasing power of money. For example, if you could buy something with $1000 now, in one years time, you would need $1020 to buy that same thing (assuming 2% inflation).
Glossary: rate of return
What you earn on your investment as a percentage of the amount you invested. For example, if you by a house for $300,000, and it makes you $15,000 from rent each year (after all the running costs have been paid), the rate of return on your asset (the house) is 5% ($15,000 is 5% of $300,000).
Glossary: vesting
Subsidised employer superannuation schemes sometimes have what's called a 'vesting period'. Vesting provisions set out the period of time you must stay with the employer before you can keep the employer's contributions. (You will always get the contributions you paid yourself). If 'full vesting' occurs at 10 years, only after that will you get all of your employer's contributions. Often, though, there will be a sliding scale. After one year, for instance, you may get 10 per cent of the employer's contributions, and after 5 years you may get half.