Putting super into perspective

Superannuation remains a dark mystery for many Australians, even though 8% of our salaries (9% from July 1) are paid into super funds each and every year.

That fact alone is a good reason for working Australians to learn more about their superannuation. An even better reason is that superannuation continues to offer significant tax concessions, compared with other mainstream investment vehicles.

“It’s a simple fact that putting money into super is one of the most effective ways of building up savings for retirement,” said Lindsay Binning of RetireInvest’s Subiaco office.

“However, that doesn’t mean people should put all their money into super. The most appropriate amount depends on each person’s current financial position and future plans.”

For instance, when people are buying their first home, they may be advised to focus on paying off their housing loan and any other non-deductible debts.

Once that is achieved, people may consider gearing (taking out a tax deductible loan) to build their investment portfolio.

Mr Binning emphasised that voluntary super contributions (on top of the compulsory 8%) should not be ignored completely. He said different investment strategies could work simultaneously and complement each other.

For instance, by building up investments outside of superannuation, people retain a high degree of financial flexibility. They have access to the investment income and, if necessary, they can sell some of their investments.

The tax benefits of voluntary super contributions can be enhanced if people implement a salary sacrifice arrangement, for example if they arrange for their employer to make pre-tax contributions to super on their behalf.

In this case, the individual pays the 15% contributions tax (assuming the surcharge does not apply) and is left with $85 out of every $100 to invest in super.

In contrast, if they receive the money as normal salary, they pay income tax at their marginal rate (up to 48.5%) and are left with only $51.50 out of every $100 to invest.

Mr Binning said many people were under the mistaken impression that superannuation was, in itself, an investment.

“The reality is that superannuation is simply a tax structure. When you put money into super, you then need to decide how it is invested.

“Another common mistake is to confuse access with control. We can’t access our super until we retire, but we do retain control over that money.”

The vast majority of super funds offer investment choice. Typically, they offer four to five investment options, from low-risk (e.g. cash and bonds) though to higher-risk (e.g. international shares).

If your super fund does not offer investment choice, you should ask the fund’s trustees why that is the case.

Individuals wanting greater investment choice can use a super fund offered by a master trust (e.g. Asgard or Summit) or they can set up their own self-managed super fund.

The trade-off is that these options may be more expensive and/or require much greater input from the investor.

Lindsay said that putting money into super at a young age offered a significant advantage, since the money would gain the full benefit of compounding returns.

“Many people wait until their fifties before putting money into super, and consequently they don’t get as much benefit from compounding.”

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