(03) 9020 2905Australia really deserves the moniker “Downunder”. We’re this little mixed up, backward, First World-like, paradise island that’s not easy to get to from anywhere.
We’re light years from our major trading partners, which occasionally give us shipping pains. People are desperate to get here, but we’ve got boat people pains.
We’ve got the climate and lifestyle for the galaxy’s greatest retirement. But then, when it comes to funding our long old’n’grey years, we have … Australia’s myopic superannuation system.
Holy crud.
Isn’t it ironic, don’t you think (thanks Alanis Morissette), that Australians have to fund their ever-lengthening retirements on superannuation strategies based on rules that seem to change, on average, every full moon?
Seriously!
This government has made significant changes to the shape of superannuation more than once a year. In some years, they have changed the same rule a couple of times. I’m not kidding.
Almost every year, this government has made it harder to get money into super. It is a fact that in this current financial year, it is harder to get money INTO superannuation than it has ever been.
How do you plan the longest investment of your life if the government of the day is not just able, but willing, to change the rules, covering investing for decades into the future, without notice?
It’s like they can’t decide whether they want to encourage you, or tax you harder. What’s super about super?
But it’s not just the government. The Opposition has flagged another bunch of changes, should it be elected to form government on 14 September. They’ll unwind some things and make some “improvements” of their own.
So, is superannuation still a good investment? Given governments are increasingly shifting the goalposts?
The answer is yes.
Huh? Why?
Simple really. Superannuation is highly unlikely to ever be taxed as heavily as regular income.
That is, if the average worker earns $10,000 in their own name, he will lose $3400 of that in tax. (Higher income earners will lose up to $4650 in tax.)
However, earn $10,000 in super and you’ll pay no more than $1500 in tax.
Now, compound that money over 30 years. Why 30 years? Because superannuation is an investment that starts at about age 20 and is designed to probably run out at about age 85 or 90. So 30 years will cover us for this example.
Let’s assume an after fees earning rate of 7 per cent, that earnings outside super continue to be taxed at 34 per cent and inside super are taxed at 15 per cent.
And let’s also assume that people understand the need to put away for their retirement. It’s just a matter of whether they do that inside or outside super.
The $6400 earned outside of super will turn into about $23,830 after 30 years. The $8500 earned inside super will turn into $48,130.
Yes, more than double. That’s the benefit of the lower tax rate in super. That, in a nutshell, is super’s main upside. Another is a tax free income after age 60.
Super’s major downside?
You can’t touch your money until you’re at least 60 (there are special rules allowing slightly earlier, partial, access for those born before mid 1964).
But not having access to a portion of your financial wealth until 60 is not disastrous. You’ll still be working and earning an income. And you don’t put absolutely everything in super.
The premise of superannuation is that governments want us to reduce our reliance on the old-age pension. In order to do that, they need to encourage people to put away for their retirement.
By getting employers to pay a portion of wages into an employees’ super fund, and then restricting access to that money until old age, they can make some adjustments to how much they need to tax the population, across the ages, to provide those pensions. That’s the theory.
It’s only now that the Baby Boomers are retiring that that theory starts to be tested. But it will take several more decades for the true benefits to be really evident.
But no-one likes making investments when the rules aren’t clear. The problem is that governments can’t help themselves when it comes to super.
Sadly, on that front, don’t hold your breath that things will change.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au), a licensed financial adviser and mortgage broker. bruce@debtman.com.au.