There's no magic pudding when it comes to super

Superannuation is supposed to be all about providing income in retirement.

 

 

In fact, legislation is before parliament to enshrine in law that the objective of the superannuation system is to provide income in retirement to substitute or supplement the age pension.

That may seem self-evident but since the superannuation system began in 1992 it has lacked a clear over-riding objective, a fact the Financial System Inquiry chaired by David Murray recommended be corrected with legislation.

Despite the government accepting the recommendation and the legislation being before the Senate in the lead-up to the federal budget, there was a wide-ranging public policy debate about the merits or otherwise of allowing early access to super balances for housing. The super industry is naturally opposed to such ideas for the sound reason that it will detract from the super account value and almost inevitably mean super balances would be lower than if access was not permitted.

But the measure the government included in the budget – allowing effectively salary sacrifice contributions up to $30,000 to be used to help with a property deposit – is perhaps a sensible compromise that could even enhance superannuation's value to the younger generation.

There is no magic pudding here. If you withdraw the money from super, even if you pay it back somewhere down the track, the simple arithmetic of compounding returns means your super balance is unlikely to catch up.

One of the weaknesses of the Australian super system is the relatively low levels of engagement – particularly among young people. That is in large part due to the mandatory nature of the super guarantee payments.

What the government proposal will do is encourage young people to take advantage of the concessional tax treatment that super enjoys. For many it may be quite a revelation of just how attractive the super tax treatment is.

Vanguard asked independent actuarial consultants Rice Warner to model a simple tax comparison to demonstrate the difference between investing inside super versus outside the super system at your marginal tax rate.

The research showed how an annual saving of $5000 would grow for a 20 year-old if it was contributed to super or was invested outside of super at the various different marginal tax rates – 19 per cent, 32.5 per cent, 37 per cent or the top tax rate of 45 per cent.

To keep the exercise straightforward investment returns were set at 7.5 per cent a year, we assumed investment returns were taken as income for consistent tax treatment and excluded the Medicare levy.

If as a 20 year-old you began saving $5000 a year and kept that up until you turned 65, then if you were on the mid-level (32.5 per cent) tax rate your savings would grow to $159,248. If you were on the top marginal tax rate of 45 per cent, that drops to $104,043 courtesy of the heavier tax take.

By comparison if you saved the $5000 a year into super with its 15 per cent tax on contributions and 15 per cent tax on earnings, the savings would grow to $306,599.

This illustrates the power of compounding over the long term. But perhaps the government's use of the super regime to allow first home buyers to save at concessional tax rates will have the added benefit of showing younger people the value of superannuation more broadly.

 

Robin Bowerman  ​Head of Market Strategy and Communications at Vanguard.
22 May 2017
www.vanguardinvestments.com.au

 

Any advice contained in this website is of a general nature only and does not take into account your circumstances or needs. You must decide if this information is suitable to your personal situation or seek advice.

Rolanda has been my financial adviser for 20 years. I have always found her to be highly intelligent, knowledgeable and professional in her career. Rolanda is accessible at all times and patiently explains terms that I do not fully understand. I can highly recommend Rolanda and it is a pleasure to do so. I do this with the utmost confidence. Marcia Montgomery (Retiree – home duties and ex-clerk with Water Board)
I retired Oct 2012, and seeking Financial Advice for my retirement funds, I decided to have Rolanda look after my financial affairs, and so happy I did. Since my retirement I am extremely comfortable with Rolanda’s advice, experience and strategies and the returns on my investments. Rolanda is my "Breath of Fresh Air" at this stage of my life and she makes herself available 24/7 should you need to talk with her. Steve Hoad (Ground Engineer, Qantas)
In 1997 I left Energy Australia and decided to join Rolanda Adams Financial Services for the financial support and advice that I would need into the future. That decision has proved a very good one and I am still with Rolanda who has given me advice and friendship over those many years. The advice given has ensured that my investments have been protected and the major losses, of some, during the GFC was not felt by me unduly. Rolanda and her team are very easy to contact at any time and one is always received in a most professional manner. I would be most happy to recommend Rolanda Adams Financial Services to all who need financial services. Graham Fleeton (Manager, Property Insurance Group Energy Australia (Ausgrid))
Rolanda has been my Adviser for the past 18 years. Through her wide industry experience and professional expertise she has ensured the sound development and ongoing management of my investments. Her advice has invariably been sound, timely and entirely tuned to meet my personal needs in retirement. She has a friendly, engaging manner and is always readily available to address any of my concerns. I have no hesitation in recommending her. Neil O'Keeffe (Chief Inspector (retired), Australian Customs Service)

© 2021 Rolanda Adams Financial Services Pty Ltd. All rights reserved. Site by PlannerWeb.