Less is More
The Australian superannuation scheme now has $2.8 trillion assets under management (as of March 2019) which makes it smaller than the Australian property market but larger than the market capitalisation of the ASX.
Superannuation is not an investment. It is a vehicle for retirement investing – a trust structure with special rules and tax concessions. ‘Super’ has developed since it became compulsory for an employer to pay it in 1992, but the basics of it have remained the same: regular contributions, invested over time, will compound into a lump sum large enough to produce annuity income in retirement.
It’s an excellent way for people invest in the property market, Australian listed securities, international shares, and Australian and international fixed interest, without having to develop expertise in these sectors, or go into debt to invest in them.
The act of regularly putting money into your super account and earning a return which is kept in your account, drives the long term compounding growth of individual super accounts.
However, superannuation is effectively a tax system and so tax planning and tax advice has a big bearing on the performance of your super.
Earnings in a super fund are taxed at only 15% - not the top marginal rate you’d be taxed if the earnings were in a non-super fund – and withdrawing super from a fund can generally be done tax-free when you're over 60 and you stop working. This helps you develop and enjoy your retirement savings, without too much being lost to the tax-man.
However, it’s the tax on the money you’re putting in – your contributions – that you have the greatest control over, and which responds the best to some financial planning.
Superannuation has a ‘concessional’ tax rate of 15% levied against contributions made from pre-tax earnings (or 30% if your personal earnings exceed $250,000 pa.). So instead of contributing earnings into super after you’ve already paid tax on them (at your income tax rates), you can use the concessional pre-tax route and pay only 15%, which means more of your money is invested.
Most Australians have an annual $25,000 limit on their pre-tax contributions. You will however need to be careful as your employer’s contributions to your superannuation fund (generally 9.5% of your salary) also counts towards this annual limit.
If you are an employee, one of the best ways to boost your super is by using salary sacrifice. This is where you make an agreement with your employer that a portion of your salary is directly paid into your your super account, rather than into your bank account.
Because the money is not paid to you as income, you pay 15% concessional rate as a contribution (or 30% if your annual income exceeds $250,000). After age 65, you can only do this having passed a ‘work test’ and you can’t salary sacrifice over the age of 75.
Salary sacrificing is a powerful way to build savings for retirement, in a tax-friendly, convenient and regular way. Consider it a regular savings plan with a tax benefit.
You can also make a personal contribution to your super fund and claim the contribution as a deductible tax expense . This brings down your income and results in you paying less income tax. But remember, your personal contributions only receive concessional treatment up to the annual $25,000 limit on your pre-tax contributions - there is not a separate or additional cap for this. It is also important to note that if you choose to claim a personal contribution, you must notify the superannuation fund and wait for them to acknowledge that request in writing. But this can be a tax-friendly way to boost your retirement savings.
In other words, superannuation offers you a chance to plan your taxes and your retirement strategy, so they work together. But you must have the right advice.
Aside from the benefits of compounding interest driving capital growth in superannuation – because less capital leaks to taxes – there are other benefits in super.
While superannuation is a very effective way to build wealth for retirement, it is a tax system and as such, it’s rules can be complex. When it comes to deciding what to do with lump sums – inheritance, tax refunds, proceeds of selling a house or a business – you should get professional advice.
The lure of superannuation for those wanting financial security in retirement, is compelling, because it is tax-friendly and by law your savings are held in your investment options until you retire. This allows a lump sum to grow to the point you can use it as retirement income.
However, superannuation can be complex and to ensure you are making the best decisions, you should first see a Wealth Market Financial Adviser.