Superannuation - forced saving in a favourable tax environment
What is the point of superannuation?
Because it’s a form of forced saving with a long term focus where funds, appropriately managed should be able to accumulate at a greater rate than other vehicles holding similar investments. The reason for this: essentially because the government takes less tax from what your money earns.
It does not matter what type of superannuation vehicle you choose to use or the type of investments you believe will give you the best chance of achieving a comfortable retirement – the reason for holding money for retirement in superannuation is the same.
It is often said that Australia has one of the best retirement systems in the world, comprising three or increasingly four, pillars:
- The government age pension funded through the tax system
- Personal savings including investment rental properties
- Personal superannuation
- The family home
Many things have changed since the aged pension was introduced in the early 1900's. Aged pensions represent one of the largest items of expenditure in the Federal Budget and the number of people of pension age is increasing. However, perhaps the most significant change is that which has occurred in individual's life spans; people are living longer meaning that the “cost” of the age pension continues to increase and potentially could be a burden on the Federal Budget.
Coupled with the evolution of our private superannuation system since the early 1980’s there has been – initially gradual then more recently accelerated – unwinding of private superannuation schemes which “promised” a benefit based on some multiple of pre-retirement income ("defined benefit schemes"), rather than an account balance accumulated over time. This means that today, for most people, the risks associated with under accumulation of superannuation savings now rests with them rather than the employer. At the same time relatively consistent but gradual changes to the age pension mean that for most people there is increasingly a need to supplement aged pension income with income generated from other assets. The Budget pressures associated with the cost of paying the Age Pension suggest this transition is only likely to continue.
Therefore most people will need to either not rely on accessing the Age Pension at all or alternatively supplement their pension from private sources – personal savings, personal superannuation or the equity in their home. They may receive some support from their children but they have their own pressures and generally this is not the norm in Australia.
But why bother with superannuation – at least over and above compulsory Superannuation Guarantee paid by employers?
There are restrictions on getting money in - how much, and in what circumstances tax deductions can be claimed for money contributed - and taking money out - mainly aged based limits which means most people under 60 cannot take money out (there are some exceptions particularly for anyone born before 1 July 1964). There are also restrictions on how and where you can invest money held in a superannuation fund.
The quid pro quo for these restrictions is that superannuation vehicles enjoy substantial tax concessions both in terms of getting money in and also when money is taken out. Remember, the restrictions exist because superannuation funds are by definition long term savings vehicles meant to be used primarily to help fund retirement needs.
If you would like to get some idea of what retirement costs, have a look at ASFA’s Retirement Standard. Centrelink publish current Age Pension rates and if you compare these to ASFA’s benchmarks there is usually a gap.
Good advice is about helping you understand where you are now (you cannot change this) and where you want or need to be (you are able to influence this) then helping you bridge this gap over a period of time. Investments and investment vehicles are only part of this. If you would like to discuss where you are now and how you can get to where you would like to be contact us today for a no obligation initial discussion.