(03) 9020 2905Bruce Brammall, The Australian, 15 August, 2021
I have spent too much of my life taking potshots at various governments and politicians for being “superannuation stupid”.
Simply, super is a thing of undeniable beauty. It should be like a siren’s song, instantly entrancing and captivating all who hear just a single note of its melody.
That is, all you lot. Any Australian who has ever worked, and many that never have.
Instead, politicians spent about a decade meddling where they ought not – stuffing things up like Chloe did when Ross and Rachel were “on a break”.
They’ve undermined what should have been a straight-up perfect marriage between Australians and their retirement savings.
Successive governments have changed rules and moved the goalposts so often that only true romantics maintained their passion through the dark times.
But it’s time to be reminded why Super is sexy. A hot prospect, quietly sitting at the end of the bar, waiting for you to pull up a stool and buy it a drink or two.
And the best bit? You won’t have to feel guilty, or like you’ve cheated, if you get lucky and take Super home.
Who’s a naughty PM?
Successive prime ministers did a good job of making superannuation look as appealing as Cinderella’s ugly step sisters. Between the first reign of Rudd and Turnbull’s exit (so, taking in Gillard, Rudd 2.0 and Abbott), super was a political football, where either the fortunes of the wealthy or the poor copped regular head-high tackles.
The amounts you could contribute to super were slashed, raised, then slashed again. Just because. Government contributions for low-income earners were on, then off, then on again.
Once tax-free pensions were suddenly taxed. And limits were introduced on previously tax-free slices of the pie.
Punters never had a chance to understand the rules. Anytime anyone understood a rule, it got changed.
That era seems to have ended. In recent years, super has had an element of consistency. In fact, instead of always seeming to get worse, it seems to be getting better.
What’s the attraction?
Good-looking people can often attribute their fortune to good bone structure, or simply good genes.
Super’s base-level appeal as an investment comes from being a tax haven. A legalised tax-minimisation scheme for Australians, for which the trade-off is delayed access. If you were born after mid-1964, you can’t touch it until you’re at least 60, maybe 65.
Super’s maximum tax rate is 15 per cent, while income earned in your personal name can be taxed as high as 47 per cent.
Any money your super earns is only taxed at 15 per cent, sometimes 10 per cent. That leaves more in your super to earn more, to again be taxed less.
But it gets better. Heaps better, like ice cream after dinner.
When you start drawing an income from it (and certainly after age 65) your super pays no tax at all on income or profits.
And let me put a cherry on top. You won’t have to pay any tax on the income your draw from your super, when you turn on the pension. Yep, tax-free income.
Now … have another look down the bar at Super and tell me that’s not hot!
Okay. I’m interested. What next?
Buy it a drink.
And by that I mean it’s time to show your super some attention.
Once you see how sexy super really is, it’s hard to unsee it. It’s then just a matter of finding ways to make your own super more and more appealing.
The good news is, it’s all in your hands. While there are limits on what you can do, for most, those limits won’t come into play.
Your personal trust fund
Consider super to be your own personal trust fund, that only pays a little bit of tax and eventually none.
If you’re an employee, most of the money put into your trust fund is put there by someone else (your employer).
And bang! You just got a pay rise. The contributions made by most employers rose from 9.5 to 10 per cent on 1 July.
If you’re truly self-employed, you don’t have to contribute to super. But if you’re at the point where income is flowing and reasonably consistent, sorry, but you’re a bloody idiot if you don’t.
Putting something into super each year will deliver you an immediate tax benefit, swapping your marginal tax rate for the 15 per cent super contribution rate.
It then also diversifies your asset base. Yes, you’re trying to build a business to do that for you. But should you really be having all your eggs in that one basket?
Also, it’s protected from any potential business creditors. And given the failure rate of small business, that should hold some attraction.
Dumping money in
Super’s rules for getting money into super are still pretty complex, when you start digging into them.
But there are two main limits most people should be aware of.
The first is “concessional contributions”. These are contributions where someone, either your employer or yourself, is claiming a tax deduction.
This covers the 10 per cent from your employer, anything you salary sacrifice or you contribute that you’re going to claim a deduction on.
The total of these contributions each year now can’t exceed $27,500.
Let’s take Ben, who earns $100,000. Ben’s employer puts in $10,000 each year into his super. Ben also salary sacrifices $10,000 – swapping a 34.5 per cent personal tax rate for 15 per cent in super (meaning his super kept an extra $1950 that would have otherwise gone to the tax office).
There’s $20,000 of his limit. If he still has capacity, he could make another $7500 contribution and get a tax deduction for it.
The other important limit – thought it’s generally only older Australians that will make use of it – is non-concessional contributions. And the limit for NCCs is $110,000 a year.
This is after-tax money. It isn’t taxed on the way in. Most people will use this to load up their super towards the end of their working lives, or when they’ve sold assets, such as investment properties, or received inheritances.
More in, earlier
Getting extra money into super, earlier in life, is important. Previous generations were literally able to shovel hundreds of thousands of dollars each year into super. That’s gone.
People should probably start from their early 30s. It doesn’t have be much. But even a few thousand dollars a year will make a huge difference. That amount should increase through your 40s.
And from your early 50s, you really need to ramp it up. Or you’re literally just donating unnecessarily to the tax office, both now and in the future.
That’s the basics of contributions. If it still sounds complex to you, I get that. But do not ignore this and bury your head in the sand. Get some professional help. There are tens of thousands of dollars of your money at stake.
Invest it properly
Equally important is how your money is invested.
How is your super invested? Don’t know? Don’t care?
Well, that’s plain stupid. It’s one of the easiest things to do and can have a massive impact on your future balance.
What if I told you that, for some, making changes here could add 50 per cent- or even double – their super by retirement?
It’s a question of risk and how much of that you’re prepared to take in your super. If you’re young and feel comfortable taking a higher risk, the possibilities are huge.
But don’t just up the risk in your super. That’s not right for everyone. Older Australians might, indeed, need to reduce the risk they’re taking, to preserve their wealth, rather than grow it. (For more detail, go to the next column – link below)
And a ripper year
And this advice without even mentioning how super performed in the last year.
I know many people don’t open their super fund statements when they arrive in the mail.
If that’s you, you really should make the effort this year. It’ll put a smile on your face.
Bruce Brammall is both a financial adviser and mortgage broker and author of books including Mortgages Made Easy. E: bruce@brucebrammallfinancial.com.au.