Why is superannuation so important?
Posted by Northadvisory on December 16, 2019
Did you know that as of 30 June 2019 the total balance of superannuation held within Australian funds was $2.9 trillion?
We have the fourth largest market in the world, behind only the USA, Japan and the United Kingdom. With so much invested, it’s crucial that you know how your fund is performing and that you are proactively managing your future wealth.
Martin van der Saag, North Advisory Founder and Strategic Advisor, discusses why superannuation is just so important.
The reality of the Age Pension
When considering retirement, it’s not uncommon to think that the Age Pension will support you during the later years of your life. It’s certainly a beneficial scheme that can help you maintain a modest lifestyle, but if you are used to having a certain level of disposable income and being free from financial strain, then relying on the Age Pension alone might be challenging.
The reality of the Age Pension is that for a single you receive $24,200 a year and for a couple you receive the combined total of $36,500. Martin says,
“Generally, for most people this isn’t much… especially when you are living in a high cost metropolitan location like Sydney. If you are a single person getting by on just $465 a week… it’s not a lot of money.
If you want more than the basics of the pension, you will have to put more in during your working years. Of course, the compulsory employer contribution is 9.5% of your salary… but if you want to make a significant difference, it’s better if you make additional contributions … how much you add of course really depends on your individual scenario. But the truth is… the Age Pension is not going to be enough for most people.”
One of the most immediate benefits of superannuation is the tax environment in which the funds are held.
They are extremely concessional and are designed to encourage people to provide for their own retirement in excess of the Age Pension. Martin explains,
“Tax rates in superannuation are definitely designed to motivate you.
For example, when you enter retirement at the age of 60 and you start to receive a pension from your superannuation… the tax rate is zero. You pay no tax on your regular pension.
So there’s no need for tax havens or complex structures… if you just put it into superannuation, when you reach 60 and receive a pension, it’s all tax free subject to a limit of $1.6million.
Plus, while you are working and receiving super contributions, the tax rate is 15% on any income earned by the fund and 10% on any capital gains earned by the fund. So again, the tax liability relating to your income through your super is significantly lower than income tax rates in other structures.
Furthermore, a lot of super funds invest in shares in publicly listed companies. The dividends the super funds receive come with tax credits of 30%… so if the tax rate is only 15% or 10% and you are receiving income with tax credits of 30%, you can see how that enhances the return the super fund will earn.
Most people, when they talk about saving for retirement, immediately think about property… they want to buy property and negatively gear… but really, putting more into superannuation probably gives them a much better option.
One of the major public offer funds has had an average return of 9.7% since 1995 and most people would be pretty happy with that. Especially when they think about the possible hassles connected with investment properties… finding tenants, regular maintenance, damage to the property… if you can receive a 9.7% return over a 40-year working career it’s certainly an acceptable return.”
Another reason that superannuation is so important is because it can be utilised to pay your life insurance premiums. Choosing to have your life insurance premium paid through your super can be very useful during your working life when you have dependants. Not having that extra monthly expense is helpful for maintaining your disposable income levels.
Martin points out that it is vital that you manage your super carefully, though.
“You need to make sure you don’t have multiple superannuation accounts. A productivity commission study identified that one third of all super accounts… around 10 million of them, are unintended multiple accounts. The study calculated that member balances are being eroded by about $2.6 billion in charges. This is represented by $700 million in fees and $1.9 billion in duplicate insurance policies. This is why you really should take the time to consolidate your super.
Identify how much insurance you need and make sure you have that. Check you don’t have too many policies covering the same thing. If you are unsure, you can always have a conversation with one of the North Advisory team. We find that we are always able to offer useful tips about managing a client’s super policy which will make a significant difference in the long term.”
Another important feature of superannuation is asset protection. Martin explains,
“Money held in super is generally protected from creditors.
Consider this situation… If you have a business and something happens and you go broke… if your inheritance was in your own name and invested in the stock market, you could lose it to creditors in bankruptcy. However your funds in superannuation are not available to creditors. This is why money in super is very good for asset protection.”
When possible, it is always a good idea to make additional contributions to your superannuation. Even in your 20s it should be a strategy that you consider. For example,
“If a 20-year-old puts in $20,000 into their super as a personal contribution… the compounding effect over 40 years is huge. That contribution will be worth a massive amount when they need it at retirement, even if they put nothing else in during the interim years.
Whether additional monthly payments or depositing a lump sum – perhaps from a redundancy, or an inheritance or a windfall… putting it into super is very worthwhile.”
Something for all ages
“There are also some specific benefits within superannuation that can help different ages. For younger people there is the First Home Super Saver Scheme. This scheme allows you to put money into your super and withdraw it to use as a deposit for your first home. It’s a small scheme limited to $30,000 but it is certainly beneficial.
Then for the oldies there is the Downsizer Contribution. Generally, you can’t make additional contributions into super because you are no longer working, but if you sold your residential property that you’ve owned for more than 10 years, you can use $300,000 from the proceeds of the sale and deposit it into super.”
Consider an SMSF
When your superannuation balance starts to grow it could be time to consider a self-managed superannuation fund (SMSF). There are particular benefits relating to the fee structure within an SMSF, as rather than being charged at a percentage of the super balance, they are fixed and based on the complexity of service.
If you find the fees within your retail fund are continually increasing, it is certainly a motivating reason to look into starting an SMSF.
Speak to your advisor
Superannuation can be complex and for many people it can seem all too hard. That’s where we can help. We can analyse your circumstances and determine how to make the most out of your super and set you up for the retirement you deserve. To find out more contact our team today.