A Super Idea

By Shane Wilson - Director DC Advisory Group

A Super Idea

Superannuation is something I am quite passionate about. This concept around investing money throughout your working life to provide for your retirement. Some people, depending on how much super they retire with, may be required to also rely on the government aged pension to meet their lifestyle needs. 

For most people, superannuation begins when you commence your working life. It was not until approximately 1983 that the government and trade unions agreed to forgo a pay increase of 3% for employees but rather have that increase placed into super. In 1992 the Keating government introduced the compulsory employer contribution scheme of which is very similar to what we know today. The superannuation concept made sense in that we were addressing Australia’s ageing population and retirement income dilemma which in time, was going to put a massive strain on the Australia economy through meeting aged pension commitments. 

According to the Association of Superannuation Funds of Australia (ASFA), superannuation assets at the end of December 2017 tipped a staggering $2.6 trillion. That amount is set to grow substantially in the years ahead due to not only organic growth but also the proposed increase in the contribution level beyond 9.5% (to increase by 0.5% each year until it reaches 12% by 2025). 

I find it interesting however, that there is a message or incentive to promote superannuation and to save for your retirement, yet the government are forever shifting the goal posts and changing laws. For me these changes often negatively influence a retirement benefit (and ultimately your retirement income) and generally disincentivises people from wanting to contribute to super. 

What do I mean? 

Some Incentives: The superannuation environment offers a concessional tax rate of 15% in accumulation phase (pre-retirement). Further, superannuation will also provide a potential tax-free income stream once retiring or in pension phase. Earnings outside super at the highest marginal tax rate is 45% plus Medicare. Superannuation is simply the best taxed structure to house your wealth leading up to and during retirement. 

Some Disincentives: The government continues to reduce annual limits for both concessional (deductible) contributions ($35,000 to $25,000) and non-concessional (non-deductible) contributions ($180,000 to $100,000) which prevents people from committing more money to super and increasing their member balances. Further, the super reforms introduced a new Transfer Balance Cap (TBC) which means that you can only ever commit a maximum of $1.6M to pension (subject to indexation). Anything over this limit will become subject to tax (earnings at 15%). If your total super balance is over the $1.6M TBC you will not be able to contribute any further to super. That means a potential ceiling on what you can get into super and also no more completely tax-free earnings within super. 

Recently we learned of a government announcement where qualifying individuals can withdraw up to $30,000 of personal super contributions (plus earnings) to help purchase their first home. Should this be allowed if you consider the long-standing sole purpose test (that funds are for the sole purpose of retirement)? Is this providing for your old age retirement? I guess that is another debate for another day. 

I still love superannuation

So, what does all this mean? I still love superannuation – my position has not changed, and this savings vehicle still carries huge benefits for all of us. I want to stress that any negative commentary should be taken with a grain of salt and we should not discount super as an integral part of any holistic financial plan. It is important to have a long-term approach to super and to saving for retirement. I want my clients to retire comfortably without having to rely on any government pension. Don’t change your mindset but rather condition yourself to adapt to change and updates to legislation. My key message if you take anything from this article would be to start saving for your retirement early because if you leave it too late and the superannuation window closes, you will lose your opportunities to get money into this great tax environment. 

It is important to note that this article is general in nature and you should seek your own independent financial advice in considering personal and specific circumstances. You should really embrace the relationship you hold with your tax professional and your financial planner. A favourite cliché of mine that you should all consider adopting is ‘failing to plan is planning to fail’. Be on top of your world.