The super deal for “Future you”

Bruce Brammall, The Australian, 26 June, 2022

Me: “What’s worth more? A million dollars in super, or a million dollars in your bank account?”

You: “Trick question?”

Yeah, a little. Obviously, they’re both worth the same. At the moment they arrive in your account, at least.

But imagine you’re 55, your home loan is gone, and you’ve got a choice of which you take. What would you rather have?

Your answer should be you’d take the million in super. Because, while it might be worth the same now, it’s worth more in future dollars for “Future You”. Plenty more.

Why? Because of how super is taxed. Which is not much really, then, eventually, it’s not taxed at all.

That’s the real power of super. Think about it. What’s the value of $1 million invested for 20 years, if it’s not taxed much for part of it, then pays zero tax? Versus paying normal tax on whatever it earns?

So why don’t more of us pay more attention to our super? It’s a legal tax dodge, your own little tax haven, without having to open a Swiss bank account.

How much more?

Your spreadsheet skills not great? Okay. Here’s something I prepared a little earlier.

What are we working with? Here’s a few assumptions. You invest in the same assets inside or outside of super. Our 55-year-old is on the average marginal tax rate of 34.5 per cent (that is, earning between $45,000 and $120,000). And the investments are returning 7 per cent, before tax.

In 10 years, the difference is your super is now worth $1.782 million, versus non-super having grown to $1.566 million. That 10 years of low tax rates has added $216,000 to the same pot of money.

If you’re earning more than $120,000, or more than $180,000, the gap becomes even bigger, because of the higher marginal tax rates that apply to non-super earnings. For those earning above $120,000, the gap widens to $263,000 and for those on the top marginal rate, it grows to nearly $343,000.

That’s a fair chunk of extra coin to have sitting in your back pocket, in a “scheme” the government encourages you to take advantage of.

But it gets way better.

Our 55-year old is now 65 and retires.

And … then there are too many variables to model after that. Read: The numbers get really complex and boring.

But here’s the gist. The money in super stops paying tax and our retiree stops paying tax on what they draw from it, versus the non-super money continuing to be taxable.

What’s missing?

Obviously, we haven’t included any other super contributions from the employee, which would further grow the super pot. But neither have we included any other savings that might be invested outside of super.

What too many fail to understand is that the beauty of super is that low-tax rate. And that’s why they should pay more attention to it.

Any dollar that your super fund earns pays tax at a maximum of 15 per cent. Any extra dollar that you earn outside super is taxed at up to 47 per cent.

Then that tax that you didn’t pay stays in super and earns more, which is also taxed at lower rates. Rinse and repeat.

But super is slumping!

Yeah, I hear you. If you looked at your super balance around Christmas and again in recent weeks, your heart might skip a beat.

It’s not super that is performing poorly. Your super is invested in shares, property, fixed interest and cash. The first three are performing terribly, while cash has been on life support for years and is only starting to show signs of life because interest rates are rising.

If you’d had the same amount of money invested outside of super as personal investments, it would have performed the same. Poorly.

Super isn’t an investment per se. It’s a “tax” and “access” structure. It pays less tax, but you can’t access, in simple terms, it until you’re 65, or 60 and retired.

Nowhere to run or hide

Virtually everyone’s super, from conservative investors to aggressive investors, is bleeding.

Conservative investors tend to have a lot more money sitting in cash and fixed interest, while more aggressive investors are in shares and property.

But, since the start of this calendar year, even conservative super investors are off around 10-13 per cent, while more aggressive investors are down 13 to 17 per cent.

There has been nowhere to run and nowhere to hide. Only those sitting completely in cash have seen their capital stay stable. But with inflation taking the value of cash backwards by more than 5 per cent and interest rates on cash still anemic, it’s not like cash is performing very well at all.

Work through the pain

But, history tells us, markets bounce back. We don’t know when. But we know they will. There might be (probably will be) more pain to come.

We might be headed into another recession. Economists seem to think so. But don’t forget economists have predicted 37 of the last three recessions.

And not being invested, or cashing everything out right now, will rarely make sense. It would have made sense six months ago, perhaps. But after you’ve taken the hit?

Super makes sense

Super still makes plenty of sense. Even while you’re nervously watching your super balance, possibly even more so than other times.

Why would you tip more money into super now? Go back and read the above again.

Super is about tax. Paying as little of it as you can.

Most people know they need to invest, or should be investing. It’s then just a decision about whether super is the right vehicle for your investments or not.

I can understand young’uns saying they don’t want to tip too much more money into super, given they can’t access it for 20 or 30 years. That’s not a reason not to put something extra in there each year, and they should, but it’s more understandable.

But if you’re on the other side of 50, then you need to be taking your super seriously.

Grand final time

Each June is grand final time for your super. The smart try to make the most of their super.

You can bump up your super, increase your personal tax deductions and, potentially, buy some assets (shares, exchange-traded or managed funds) in super at low prices.

Those wanting to get a tax deduction and get some money into super need to act.

You can contribute money to super and get a tax deduction for it. However, there are a few things to keep in mind. There is a limit of $27,500 a year that can be contributed tax-effectively, and this includes contributions from your employer via the 10 per cent super guarantee and anything you have salary sacrificed.

For those who had less than $500,000 in your super as of 1 July 2021, you might be able to tip in more, via the “five-year catch up” rules. But they’re complex. Get some advice before going down this path.

Importantly, for the contribution to count towards the year’s contribution limits, it needs to be received in your super account by 30 June and that can take a few days.

Super dollars worth more

But understand, the value of a dollar, or a million dollars, in super is generally worth more than the same value outside of super. It’s the low-tax rate it pays, compounding over decades, that gives it a higher value.

Ignoring your super, particularly once you’ve hit 50, is like donating extra unnecessarily to the Australian Tax Office. Crazy.

If super has simply been a statement that arrives twice a year that you ignore, then get help. “Future You” will be angry with “Current You” if you don’t.

Bruce Brammall is both a financial adviser and mortgage broker and author of books including Debt Man Walking. E: bruce@brucebrammallfinancial.com.au.