Why do we have super? Essentially, it was started by Labor governments in the 1980s to be retirement savings for Gen-Xers (and other generations who follow) to be able to look after themselves later in life.
Why do we have super? Essentially, it was started by Labor governments in the 1980s to be retirement savings for Gen-Xers (and other generations who follow) to be able to look after themselves later in life.
To that end, the government taxes superannuation at reduced rates (15% as a maximum within super, versus up to 46.5% for income earned in our personal names).
How does the money get into super? There are a few ways. It depends on whether you’re an employee or self-employed.
Superannuation guarantee
If you’re an employee (above certain minimum incomes), your employer has to pay 9% of the salary paid to you into superannuation, which is known as the superannuation guarantee. It was designed to get employers to shoulder some of the burden of making sure their employees have something in retirement.
Salary sacrifice
Salary sacrifice is one way regular employees are encouraged to put money into super. It is based on the understanding that the government will tax you less if you agree to sacrifice a portion of your future salary to put away for your future retirement. As a result, you can only agree to sacrifice salary that you have not yet earned. The money you salary sacrifice into super is only taxed at 15% on its way into the fund (versus up to 46.5% in your own name).
Self-employed
There is nothing stopping people who are self-employed from contributing to their super, but there is no requirement for them to do so. As a result, the self-employed often don’t contribute anything to super in the years when they are building up their own business.
They are encouraged to contribute to their own super, however. And there are tax advantages for doing so. The government will allow the self-employed to claim a full tax deduction for any money they contribute to their own super (up to certain limits).
Non-concessional contributions
All super fund members can put some of their own after-tax money into their fund. This is called a non-concessional contribution.
As full tax has already been paid on the money and no one is claiming a tax deduction on the contributions, no contributions tax is charged as it enters the fund.
How super is invested
Superannuation fund managers invest in the basic investment assets; cash, fixed interest, property and shares. At the moment, most superannuation is managed fund superannuation; that is, the trustees of large super funds pool the money from members and place it with fund managers.
Because most people don’t take an active interest in their superannuation and how that money is invested, super fund trustees have to choose a default option. This is usually into a balanced fund. About 60–70% of the money is invested in shares and property and the remaining 30–40% is invested in cash and fixed-interest investments.
Is balanced super right for Gen-Xers?
There would certainly be a lot of people who should be invested in a balanced fund. But it is a style that neither takes into account the age of the investor nor their risk profile. It’s the safe option for trustees or employers to take, like putting Billy Joel or Phil Collins on as background music at a dinner party. It’s not great, but it’s unlikely to make anyone angry.
A balanced fund doesn’t recognise, for instance, that a 25-year-old joining the workforce can afford to take on bigger risks (in the hope of gaining bigger returns) because they have longer to retirement.
Where’s your super hanging out now?
Off the top of your head, can you answer these two basic questions?
Now… go and grab your last super statement. If you’ve answered both correctly, then congratulations, you’ve reached a bare pass mark, you may well yet graduate from Summer Bay High (and hopefully get to leave behind Home and Away for good!).
If you have previously filed everything without reading it, you may have just discovered that your super is invested in something that is about as exciting as a Barry Manilow concert. Your fund name might have the word “balanced” in it, or something equally unappealing, like “moderate”, “balanced growth”, “defensive growth”, “moderate growth” or “conservative”.
The titles mean nothing. Any of these terms can mean anything. A “defensive” fund can actually be quite aggressive and a “growth” fund can be quite conservative.
You need to dig a little deeper. Call your super fund and ask them, “of the fund that I’m invested in, what percentage is invested in Australian shares, international shares, property, fixed interest and cash?”
How you can double your super in retirement with 15 minutes’ work now
Let me show by example.
Sally is a 30-year-old earning a salary of $70,000 a year, with $50,000 already in super. She is getting $5355 ($70,000 × 9% – 15% contributions tax) paid into her super fund each year by her employer.
Sally is currently in a balanced fund, which is 60% invested in shares and 40% invested in cash and fixed interest. She’s too young to know when she might retire, but admits that she’s a bit of a spender, so she might have to work a little longer, perhaps to age 65. So she has 35 years until retirement. Sally decides to switch her super from the balanced option to a high-growth (all shares and property) investment option.
If her money had stayed with the balanced investment option, she could have expected to receive a compound annual return of approximately 6.6% a year after fees and taxes (because a portion of her money is invested in lower return cash and fixed-interest options).
If that assumption turns out to be correct, Sally could look forward to having about $1.24 million in her super fund when she retires. We have ignored salary inflation in this section, so that the dollar numbers are effectively in today’s money.
An all-growth fund is likely to have a higher return over the same period. If Sally’s fund were to return 9% a year (after tax and fees), then her super would be worth about $2.495 million when she retires. That’s slightly more than double the balanced option.
You, again: “But that’s 35 years! How does she do it in 15 minutes?” Sally grabs her last super statement and finds out that she’s invested in the balanced fund (one minute), calls her super fund (gets stuck on hold for two minutes) and asks her super fund to send her the forms for an investment switch (another two minutes). So far, five minutes.
A week later, Sally gets a letter from her super fund in the mail. She opens the letter, reads the investment documentation (four minutes) and fills in the form (four minutes). Sally finds an envelope and a stamp (two minutes). She’ll post it on the way to work tomorrow. Total: 15 minutes, spread over two days.
And that’s the long, old-fashioned way of doing it. With most super funds, you can download the documents and forms you need from the website, print them and post them in.
Super’s warring factions
The superannuation industry employs tens of thousands of people, as could be expected of an industry in which almost everyone in the country has a personal interest.
But it is far from being one happy little family. There’s more factionalised fighting and strained alliances in the super household than in any single episode of The Brady Bunch. And since the introduction of Super Choice in 2005 – which allowed about half of Australia’s workforce to be able to choose any fund they wanted to invest their super – there hasn’t been a day of peace.
Industry funds
Industry funds are low-cost, non-profit organisations that plough profits and costs savings back to their members to improve retirement benefits. They normally offer some insurance (life, TPD and income protection), as far as it can be purchased or paid for through superannuation. But they are unlikely to offer members much in the way of financial advice outside super (and perhaps life insurance).
Corporate funds
Corporate funds tend to be a low-cost, low-advice model that is unlikely to offer much outside of superannuation and insurance advice. Employers themselves used to run corporate funds, but nowadays businesses tend to hire outside fund managers to run their super for them.
Retail funds
Small employers and individuals often use retail funds to administer their super. They are also used by those who have changed jobs on a regular basis. Retail funds tend to charge higher fees for their services, because they are dealing with individuals, rather than a large employer base. (They are also private businesses and need to turn a profit, unlike industry and corporate funds.)
They are likely to have financial advisers aligned to them, who can service clients more broadly and potentially offer them investment opportunities outside of superannuation.
Self-managed super funds
Think you could do a better job yourself than the industry/corporate/retail super fund that’s been looking after your money? Well, a self-managed super fund (SMSF) could be for you.
The real draw of SMSFs is that they offer their members (who must also be trustees of the fund) the ability to control their investments. If the fund is big enough, an SMSF also has the potential to be able to reduce the overall fees that you pay for the management of your superannuation. That is, it doesn’t take a lot more work to do the accounting for $2 million of assets in super than it does for $200,000 of assets in super. It also allows the members to have greater control over the fund’s taxation, because they can decide what assets to buy and the timing of the sale of those assets.
Speak to an adviser
Anyone interested in running their own SMSF should, at a minimum, speak to an accountant who has experience with SMSFs, but should also consider adding a financial adviser to their “super” team.
SMSFs are complex beasts. The obligations of trustees can be quite onerous. And as much as you pay others to make some decisions, the ultimate responsibility lies with you as the trustee.
Bruce Brammall has just released a new book, Debt Man Walking – a 10-step investment and gearing guide for Generation X. This report first appeared in Eureka Report.
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