Australia has a great superannuation system. In fact it is arguably the best in the world. Unfortunately many Australians do not know how good it is, so this article is going to highlight some of the benefits.
The very first thing to understand is that superannuation is not an investment. It is much more appropriate to think of superannuation simply a tax shelter or a trust structure. And as such anyone who states that “super is a bad investment” is misguided and should instead be saying “what I invested my super in was a bad investment”.
- Low tax environment – The earnings in superannuation are taxed at 15%. For capital gains where an asset has been held longer than twelve months the tax is 10%. If you are earning more than $18,200 then this is less than your personal tax.
- Salary sacrifice – This is where you reduce your taxable income by contributing a portion of your income into superannuation. It can produce significant tax savings. My previous salary sacrifice post provides detailed information.
- Forced long term investment – Like it or not, you won’t be able to access your superannuation funds until you retire (with a few exceptions). This means that the investments you hold within superannuation will have the benefit of compound growth for decades.
- Numerous investment options– It’s not just ‘balanced funds’ anymore. It is possible to structure your superannuation so it can invest in managed funds, direct shares (Australian & International), cash, term deposits, residential investment properties, commercial offices, artworks, wine etc.
- Government benefits – Depending on your income you may be able to get free money from the government; courtesy of tax payers. These are the government co-contribution (if income <$61,920), spouse super contribution tax offset (if spouse has income <$13,800) or low income super contribution (income less than $37,000).
- Deductible Death & TPD insurance premiums – Most people agree that having Life cover is the responsible thing to do, especially when there is debt, kids or a non-working spouse involved. When you pay Death and TPD premiums outside of super you are using after tax dollars. By paying the premiums from your super you not only assist your cash flow but effectively get a tax deduction on them as it is paid from concessionally taxed dollars.
- Centrelink Protection – If you are under age pension age and in receipt of a Centrelink benefit which is reduced by the asset or income test, then you can usually use your super to help “shield” assets from being counted towards these tests.
- Asset Protection –Your superannuation balance is usually protected from creditors or in the event of bankruptcy. This is however on the proviso that you haven’t been adding funds just to escape the creditors.
- Tax –free environment – When you retire and move your super into pension phase the earnings are taxed at 0%. The capital gains are taxed at 0%. The pension payments are taxed at 0%.
- Because you need it – We’re living longer and retiring earlier. When this double whammy to our collective retirement aspirations is combined with a shrinking workforce it means the government simply won’t be able to fund our retirement. We must do it ourselves; at least we have a decent vehicle to do such.
If you care about what will probably be your biggest asset at retirement (excluding your home), you need to ensure your super is structured appropriately. I have seen some shockers over the years which include 5% entry fees, 3+% ongoing fees, dud investments etc. Come and have a free consultation where we can check that your super is appropriately structured for you.