Superannuation Advice.
your choice.
While it may feel like a long way away, it’s never too early to start thinking about your retirement and optimising your superannuation account.
Despite numerous changes to superannuation and pension funds over the years, ‘super’ remains a highly tax-effective way to save for retirement. And while it is by no means the only way to grow your wealth, superannuation should play a significant role in your overall financial strategy.
Essentially there are three types of superannuation funds in Australia, each with its own unique advantages (and disadvantages): ‘industry’, ‘retail’, and ‘self-managed’. While any one of these options can work well, the challenge is finding the most appropriate solution for you.
If you’re unsure about your new or existing super fund, it’s important to get a second opinion. A qualified financial advisor will consider your retirement goals and preferences, narrowing down the superannuation universe to a few ‘best’ alternatives.
SUPER VS OTHER INVESTMENTS…
Superannuation is a tax-advantaged, long-term savings structure designed primarily for retirement. Comparing it to other forms of investment like property, shares, or term deposits highlights several benefits, as well as considerations. Here’s a breakdown of the advantages of superannuation versus other investment alternatives…
1. Tax Advantages
Lower Tax on Contributions: Contributions to super (from employers or via salary sacrifice) are taxed at 15%, which is lower than most individuals’ marginal tax rates. This can significantly boost savings for those in higher tax brackets.
Tax on Earnings: Investment earnings within super are taxed at a maximum of 15%, which is often much lower than the tax on earnings outside of super, particularly for high-income earners.
Tax-Free in Retirement: Once in the pension phase, withdrawals and investment earnings within super are tax-free for individuals over 60.
Comparison with other investments…
Property and shares are taxed at the individual’s marginal tax rate, although capital gains tax discounts apply if assets are held for over a year.
Bank interest is taxed at marginal tax rates, with no special concessions.
2. Employer Contributions
Employers must contribute at least 12% of an employee’s ordinary earnings (Superannuation Guarantee), which is effectively "free money" for employees.
Over time, compounded contributions significantly increase the super balance without the individual needing to make additional investments.
Comparison with other investments…
Other investment options require individuals to provide all funding, with no mandatory employer contributions.
3. Forced Savings
Superannuation locks away funds until retirement (generally after age 60), reducing the temptation to dip into savings prematurely.
This enforced discipline ensures Australians have a nest egg for retirement.
Comparison with other investments…
Property or shares can often be liquidated (though illiquidity issues may apply to property), making it easier to access funds but harder to maintain disciplined savings.
4. Professional Management
Super funds can be professionally managed, providing diversification and expertise without requiring investors to make daily decisions.
Members can also choose between different investment options (e.g., balanced, growth, or conservative) based on their risk appetite and retirement timeline.
Comparison with other investments…
Managing a share portfolio or investment property requires active decision-making and expertise.
DIY investors may face higher risks due to lack of diversification or poor market timing.
5. Long-Term Growth
Superannuation is tailored for long-term growth through compound interest, benefiting from years of reinvested earnings.
Many super funds perform consistently well due to professional management and long-term strategies.
Comparison with other Investments…
Property and shares can also grow significantly over the long term, but they are subject to more direct market volatility and often require substantial upfront capital.
6. Estate Planning Benefits
Super can be passed to dependents in a tax-effective way, offering benefits for beneficiaries.
Many super accounts include life insurance and total and permanent disability (TPD) coverage.
Comparison with other investments…
The tax and estate implications for non-super investments can be more complex and less favorable.
7. Low Management Costs
Most efficient super funds, particularly those using ETFs or direct shares, have relatively low fees compared to actively managed funds or the costs associated with owning and maintaining property.
These days, transparent fee structures make it easier to understand the true cost of managing your superannuation.
Comparison with other investments…
Property involves ongoing costs (e.g., maintenance, rates, property management).
Share trading can incur brokerage fees, and actively managed funds often charge higher management fees.
8. Protection Against Bankruptcy
In most cases, superannuation is protected from creditors during bankruptcy, offering an extra layer of security for individuals in financial distress.
Comparison with other Investments…
Other assets, like property or shares, are generally not protected and can be liquidated by creditors.
Considerations and limitations of superannuation…
While super has significant benefits, there are also drawbacks when compared to other forms of investment:
Limited Accessibility: Funds are typically inaccessible until preservation age (usually 60+).
Investment Choice: Some retail or industry super funds offer fewer direct control options than personal investment portfolios.
Regulatory Risks: Superannuation policies and tax rules are subject to government changes, potentially affecting long-term strategies.
Conclusion
Superannuation is an effective, tax-efficient investment vehicle designed for retirement, offering unique benefits such as tax concessions, employer contributions, and long-term growth. However, super’s restricted access and reliance on regulatory frameworks make it less suitable for short-to medium-term financial goals, compared to other investments like shares or property.
Rick Maggi, Financial Advisor, Perth
