While researching this article, a Google search of ‘is superannuation worthwhile’ produced 1.5 million results.
If you exclude the sites written by institutions, financial planners and other industry players with an inherent bias towards managing OPM (other people’s money), the genuine opinions on the merits of superannuation vary widely.
The commentaries align with my experience in the financial planning industry. Those closer you are to the retirement finish line, the more superannuation interests you.
The over 45 group (on average) tend to view superannuation through more favourable eyes.
Those aged 30–45 are sceptical of what awaits them in twenty to 30 years’ time. They’ve lived long enough to develop a healthy distrust of politicians and their word. Also, this age group is more often than not neck deep in mortgage debt and in desperate need of every after-tax dollar they can get their hands on.
And the under 30s really could not care less. It’s all about lifestyle and being connected. When you are in your 20s, the future is something that never comes. I vaguely recall thinking the same thing myself.
Superannuation has an image problem across all age groups. Even those like myself who view superannuation favourably, acknowledge that uncertainty is a constant bedfellow of superannuation. 30 years of tinkering with the rules has left most in a state of confusion over what they can and can’t do with superannuation.
Very few remember how simple superannuation was prior to 1 July, 1983. This was the date then Treasurer Paul Keating decided superannuation would become the government’s preferred retirement savings vehicle (and, as an aside, deliver more tax revenue to the government).
For a trip down memory lane, let me share with you how simple superannuation was before July 1983.
There was no tax paid on contributions. The superannuation fund earnings were tax exempt. Anyone, irrespective of age, could access their superannuation balance and only 5% of the amount withdrawn was subject to tax.
Back in 1981, at the ripe old age of 22, I remember withdrawing my superannuation to pay for an overseas trip. Those were the days.
To be fair, the pre- July 1983 superannuation system — as attractive as it was to taxpayers — needed to be amended to reflect the longer term demographic change (and the cost of that change) occurring within our society.
The problem is Keating’s superannuation model (which by the way retained the NO tax on contributions and earnings) has undergone so many alterations that confusion and scepticism now reign supreme.
In 2007, the Howard Government (who milked superannuation contributions from higher income earners with a surcharge for nearly a decade to help repay Keating’s debt) decided to reform superannuation to make it easier to understand.
The most notable component of the ‘reform’ was to remove the lump sum tax payable on lump sum withdrawal for those aged 60 and over. For this age group, all withdrawals are tax free.
This generosity was able to occur because the government was debt free (Costello left the hapless Swanny a balance in the bank). A cynic might also suggest the reforms may have been a baby boomer vote buying exercise prior to the 2007 election. If this were the case, then the tactic failed.
There is no doubt this rule change certainly upped the attractiveness of superannuation for those who could see ‘the finish line’.
If you are aged 60 and over, the combination of tax free earnings (provided the super fund is in pension phase) and tax free access to the lump sum is a real winner.
For those whose finish line is over the horizon, these changes only reinforced what they consciously or sub-consciously thought — those baby boomers are a pampered lot.
Fast forward seven years, and again we have a government in need of dollars. Treasury is eyeing the superannuation cash hoard (over $1.3 trillion) as a partial cure to the nation’s public debt woes.
Rumours abound on how the Treasury bean counters can snip a bit here and there from your retirement fund. What’s most galling about this exercise is that the senior officials looking for ways to give your retirement fund a haircut, will not have their public sector retirement funds disadvantaged by any of the proposed rule changes. Hypocrites.
Anyway, as my mum said, ‘don’t look for fairness in an unfair world.’
And it’s not only the Treasury boffins floating ideas on how to trim back the tax advantages associated with superannuation.
The Association of Superannuation Funds of Australia (ASFA) recently released a report recommending a lifetime contribution cap of $2.5 million. The contribution cap is a new twist on the old Reasonable Benefits Limit that was abolished in the 2007 ‘let’s make it simple’ reform.
In releasing the report, ASFA Chief Executive Pauline Vamos said:
‘While tax concessions are a very important feature of our superannuation system, once people have accumulated more than enough money to fund a comfortable lifestyle in retirement, they no longer require government assistance. With this in mind, there are a number of ways government policy could be adjusted to make sure that people are using superannuation for retirement purposes, and not as a wealth accumulation tool.’
For most people, the prospect of contributing even half of the proposed cap during their lifetime would be a dream come true.
However, those with wealth and close to the finish line do have the opportunity to contribute a maximum of $540,000 of non-concessional (after tax) contributions every three years. In addition to this, they can also make tax deductible contributions (for those over 49) of up to $35,000 per annum. Just writing this little paragraph on the ‘do’s and don’ts’ of contributions gives you some idea why most people find super so confusing.
Why the proposed limit? Well, if you have the means to start early enough, stockpiling wealth in an investment vehicle that has zero tax on earnings (when in pension phase) and a zero income tax liability for those over 60 receiving the superannuation pension has a whole lot of appeal.
According to the report, there are some (not many mind you) private superannuation funds where members have over $100 million. Based on current interest rates of say 3.5%, it means $35 million of earnings that are completely tax free. There will always be division on whether this is fair or not. But these are the tax rules that apply today, so why not use them to your advantage. And as Kerry Packer famously said ‘
‘I am not evading tax in any way, shape or form. Now of course I am minimizing my tax and if anybody in this country doesn’t minimize their tax they want their heads read because as a government I can tell you you’re not spending it that well that we should be donating extra.’
So is superannuation worth it or not? There is no definitive answer to this vexing question. It really does depend on where you are at in life.
For those approaching retirement (over 55) and debt free, the answer is absolutely. Pile as much in as you can. The caveat with this is that the rules are almost certain to change. Some of the gloss will surely dull, but probably not enough to warrant exiting super.
If you are under 55, you need to weigh up whether you are more in need of cash today rather than retirement capital tomorrow.
Theoretically, the earlier you start saving, the greater the compound effect in later years. However, this theory doesn’t stack up if you live a miserable life in the interim.
With my daughters — all in their 20s — they just do not have the spare cash available to consider salary sacrificing into superannuation. Even though the longer term benefits have been drummed into them, they have no desire to live like hermits to validate this theory.
Also, the further you are away from retirement, the more certain it is that access to a lump sum will be withdrawn. Australia is one of the only countries in the world that has this option. Nearly every other country provides a pension stream to the member, and upon their death, the pension reverts to the member’s spouse (if they have one). When both pass away, the member balance is retained by the fund. This is the retirement income model we are almost certain to have within the next two decades.
Superannuation is a tax effective shelter for savings. Just how valuable these tax savings are is for you to decide depending on where you are at in life.
Personally, as I approach my 55th birthday (next month), I have a very favourable opinion of superannuation. However, I am a little apprehensive about the tax free access to superannuation after age 60 remaining that way over the next five years.
All you can do is weigh up the merits as you go along. If necessary, adapt your retirement savings and investment strategy to accommodate any rule changes. This is nothing new. We’ve been doing it since 1 July, 1983.
Editor, Gowdie Family Wealth