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Bruce Brammall, The Australian, 12 November, 2023
Whenever you decide that you like something enough to want to become really good at it, what do you do?
You study it. You find out what the real point of it is. You listen to the experts. You find out what separates the great from the good.
And, most importantly, you learn “the rules”.
Whether it’s a sport, your career, a hobby or your personal finances, those that are going to do it best tend to learn things from the inside out.
And everything has rules. From the obvious ones of sport, to getting better at your hobby, to playing the rules of your career (or office politics).
Superannuation is no exception. A lot of people of average means build an awesome super (and non-super) warchest by learning enough about super and investment to make it work harder and smarter for them.
And a lot of people who earn big bucks end up with retirement savings that simply aren’t going to support the life they’ve become accustomed to, because they ignored it.
(And then there are others, who just can’t get interested but know they shouldn’t ignore it, who pay for advice to get them to where they want to be without having to spend the time learning everything themselves.)
Super’s rules
What’s the point of superannuation?
In essence, it’s a government-sanctioned tax shelter to encourage you to put away for your retirement (to reduce pressure on government paying for the aged pension).
A tax shelter? Yes. At most, you’ll pay 15 per cent tax on what goes in and what the fund earns.
If you have literally the same investments outside in your personal name, the average wage earner is going to pay 34.5 per cent tax on the income from what those investments earn. High income earners are going to pay 47 per cent.
Over a working life, as your super is building from the contributions your employer is putting in, every extra dollar it earns on its investments is taxed at 15, not up to 47, per cent.
What you get to keep after tax is the most important. And swapping 47 cents in the dollar for a 15 per cent tax rate?
Steak knives
But wait, there’s more. Super gets even better when you retire.
When you start drawing a pension from your super, it pays … no tax. At all.
Your pension fund stops paying tax on any of the income, dividends and capital gains. And you don’t pay any tax on what you draw as a pension.
Even in retirement, the income and gains from all of your other other investments are taxable.
So, a million bucks in super is definitely worth more than a million bucks in most other investments. Because if $1 million in a super pension earns $70,000, there’s no tax. In your own name, you will lose a chunk in tax (depending on what other income you have in retirement).
Locked up
So why wouldn’t you have all of your investments in super?
Super comes with restrictions. One of the most important ones is that you can’t access it until you are 65, or 60 and retired (or changed employers).
So, a 30-year-old piling everything into super is probably not wise. They’ll need access to money for mortgages and kids and life over that time. But putting away a little extra each year should be a no-brainer. A little bit of (salary) sacrifice now, with less tax, for a better retirement.
Investing outside of super, even with the higher tax rates, will be more appealing, to maintain access to the money.
But as you get older, particularly into your late 40s and 50s, the once far-off concept of retirement starts to dawn as reality. And ploughing more into super makes more sense.
When you’re actually within 5-10 years of retirement, with the mortgage all-but gone and the kids getting older, saving a wad of tax now that you’ll be able to get in a few years should be a no-brainer.
If you’re not making the most of super at that stage, you’re donating extra to the tax man. As the late, great, Kerry Packer once said: “As a government, I can tell you you’re not spending it that well that we should be paying extra”.
Getting money in
Getting enough money into super is the challenge. It used to be far easier for previous generations, who could literally shovel money into super.
Given the tax concessions, governments have strictly limited how much can go in at a 15 per cent tax rate.
That limit is currently $27,500. And it relates to money that someone is claiming a tax deduction for, either you or your employer.
Employees have, currently, 11 per cent of their salary each year put into super by their employer (who claims a tax deduction). That makes up part of the $27,500.
The other contributions that count towards this limit are salary sacrifice and “personal deductible contributions”.
So, if you’re earning $100,000 a year, your employer is putting in $11,000 a year into your super. In order to get up to the $27,500, you could make further contributions of up to $16,500.
This can be done either through your employer as salary sacrifive, or you can put it in yourself and claim a tax deduction for it, through your tax return. (Either way ends up the same from a tax perspective. It’s more a budgeting and timing preference.)
What’s the benefit? If our $100,000 a year employee were to put in $16,500, their super fund would pay only $2475 in tax on the way in, but you would pay $5692.50 less tax (either through your employer, or receive back as a tax return).
Back to the future?
If this is sounding good and you wish you’d done it earlier, some good news. There are rules allowing you to use limits from previous years that you didn’t make the most of.
These are known as the “carry forward” rules and allow you to make contributions up to the limit, for up to five previous years.
Don’t know how much you didn’t use? The ATO keeps records and provides those details through your “mygov” portal.
More, please sir?
There is another limit, known as the “non-concessional contributions” limit. This is $110,000 a year, with the ability to put in up to three years at once.
This money isn’t taxed on the way in to super, as it comes from savings that have already been taxed.
Why would you put this money into super? Same reason. What it earns in super is only taxed at 15 per cent. Until retirement, when it pays no tax at all.
Again, as you get closer and closer to retirement, having your money earning at the lower super tax rate should become more and more appealing.
Because, as we all should know, it’s what we get to keep after tax that is the most important number in investing.
Investing and risk
“But it’s not just about the tax benefits, is it?” I hear you ask.
Of course not. The success of your investments is also, obviously, critical.
The risk you take with your super investments is also something you (generally) have control over. Most super funds will give you at least half a dozen options, with some allowing hundreds of choices.
You can start to work out how much risk you are naturally prepared to take by using a risk profile tool (available online).
But when investing your super, it often pays to understand the timelines involved.
Your super isn’t designed to be taken as cash when you retire. At that point, you turn on a pension that continues to be invested, while paying you out over a decade or two or three.
Therefore, a 50 year old should necessarily be investing with a 15-year timeframe, until they hit 65. Their pension will hopefully last them until they are 80 or 90. At age 50, your super will likely be invested for another 30 or 40 years.
If you take that longer timeframe into account, wouldn’t you take more risk and have more in shares and property?
Too hard? Get help
Superannuation is a game with a lot of rules. I’ve only covered a few today.
Some basic rules can be learned. Sadly, the rules keep on changing. (But so do the rules of rugby league, AFL and cricket.)
If you don’t have time, or super’s sexy side just isn’t hot enough to hold your attention, don’t ignore it.
Get help. Financial advisers eat super’s rules for breakfast.
Bruce Brammall is both a financial adviser and mortgage broker and author of books including Debt Man Walking. E: bruce@brucebrammallfinancial.com.au.