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Email. reidcont@tpg.com.au
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www.reidconsultants.com.au

The months are running down to take advantage of the changes made to superannuation announced in the May 2006 Budget by the Treasurer. Significant changes take place from 1 st July 2007 and action now is required to take advantage of specific transition benefits if you are able to. Superannuation is the choice of government as the vehicle to provide for retirement benefits. The government has made these changes to encourage further use of the superannuation scheme.

There is nothing magical in superannuation, it is simply a concessionally tax investment fund or portfolio. Look at it this way, if you own individual shares, that is classed as an investment portfolio. You are fully taxed on any earnings made, i.e. dividends paid or re-invested and if you sell the shares, you are up for Capital Gains tax (CGT) at your marginal tax rate. A superfund is simply a larger version of this but with tax concessions granted by the government as an inducement for you to put your money into it for your eventual retirement.

While superannuation has been around a long time, it was only in the early 1990's under a Labour government that the Superannuation Guarantee Charge (SGC) was introduced making it mandatory for employers to contribute to a superfund on behalf of their employees. Prior to that, it was a benefit provided by some large companies (and governments) for their managers and executives and rarely did the opportunity to join become available past that level.

The SCG started life at a very low 3% of wages and was used as a bargaining tool to contain wages growth as well as providing the eventual retirement benefit for our ageing workforce, instead of people relying solely on a government aged pension. Over time, it increased to 6% then to 9%. Unfortunately a change of government derailed the planned increase that was to take it to 15%.

It seems strange to people who deal with finances, that most people ignore what their own superannuation is about and their eyes glaze over at the thought of even discussing super. It comes across as just too hard and it doesn't really affect them. Wrong. This is your retirement benefit or supplement to the aged pension. If you are not aware of how low the aged pension is, let me show you the numbers. A single pensioner - $525 per fortnight or $13,650 per year A couple pensioner - $877 per fortnight or $22,802 per year. These are the maximum rates and subject to both an income test and an assets test. It is set as 25% of the average weekly wage.

A survey by actuaries Rice Walker in 2005 showed that for each age group, there needs to be significant additional super contributions above the SGC to close the retirement savings gap, from 8.8% per annum for males 25-29 to 15.3% for aged 50-54. These are big numbers.

We need to save more for our retirement. No longer do we retire at 65 and then have an average 7 years in retirement before death, perhaps as our parents or grandparents had. We may have up to 30 years in retirement. The question is then, what lifestyle do you want in retirement? As a very broad estimate of how much is enough, work out what you want your income level to be (often in the range 60 to 80% of pre-retirement net income) then multiple that by 15. If you are currently earning $100,000 between you, say $79,000 after tax, at 80% retirement lifestyle income is $63,200, the savings required to fund that is $950,000. The 9% SGC will most likely not be sufficient.

For most people, superannuation is not the full answer but it should be considered and made the best use of. The benefits are tax concessions, both on money going in, money generated by the superfund in its earning or accumulation phase and money coming out. Further concessions are granted when the superfund is converted to a pension or payment phase. The downside is that the money is effectively locked away until a condition of release is obtained, meaning reaching the age of 65 or reaching preservation age (generally 55) and permanently retiring. For young couples/singles or families with children, it is often not possible or practical to contribute more in to super during this phase of life, but there are instances where the government has provided additional incentives too good to miss. Salary sacrifice into super is often a very effective approach to increase your super amount cost effectively.

The graph on the left shows the accumulation effects of constant contributions over time with the earnings within the superfund itself. Your control is over the choice of investment portfolios within the fund. Most funds offer a range of investment portfolios, being varieties of asset mixes within a portfolio (see our Oct ‘06 newsletter for an explanation of this). These generally range from conservative to aggressive. Your choice should be carefully considered, based on your age, what you need to achieve as an end result, your risk profile and your investment time frame. This is important and too often neglected.

There are a variety of options, industry funds (like STA, CBUS, HESTA, REST etc) are advertising heavily based on lower fees and commissions and are often shown to produce better outcomes than retail funds (MLC, AMP, etc). An option heavily promoted by accountants and financial planners are Self Managed Super Funds (SMSF). These may be cost effective once you reach a critical value, perhaps $400,000 but imposes fairly strict and compulsory obligations on you. Seek professional advice for what suits you and your circumstances.

There are government incentives some people can take advantage of, the government co-contribution and spouse contribution are two of these. They are aimed at the lower income individuals, but for people earning less than $58,000 you may be eligible to receive the co-contribution. If you earn less than $28,000 and personally contribute $1,000 to your super, the government will contribute $1,500 in one year to your superfund.

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