Unravelling the new super changes
THE long awaited Cooper Review into superannuation was released last week and predictably its contents dominated the headlines of most newspapers the next day.
As a result I spent most of the week on various radio programs talking about what the changes would mean to the average person. The most common question was “Why is superannuation so complicated?”
Yet, if you look at it step by step there is really nothing too difficult about it.
Your employer is required to contribute 9% of your gross salary into a superannuation fund and the government takes a 15% tax from that contribution. While your money is accumulating within your fund, the tax on its income is just 15% per annum which is almost certainly less than your own marginal tax rate. This means the money can grow faster inside super, than if held in your own name, as the after tax returns should be higher.
Because the government is giving you tax concessions to encourage you to save for your retirement, the money in your superannuation fund is inaccessible until you retire after reaching your preservation age. This is at least 55, but higher if you were born after 1 July 1960. All withdrawals from super are tax free once you reach 60 and when you start an account based pension from your fund, as most people do, the fund itself becomes a tax free fund.
For retirees it is a money paradise. You are allowed to hold your money in a tax free fund, while drawing a tax free income from it.
Unfortunately, the average Aussie does not understand that superannuation is not an asset like property or shares, but merely a vehicle which lets you hold assets in a low tax area. That’s why they love super when the market is booming, but hate it when the market is down.
To make the most of your superannuation you need to understand the workings of our old friend compound interest. Think about a person aged 25 who currently has $10,000 in super and who earns $35,000 a year. If inflation is 3% per annum and their salary increases by inflation they will have $1.626m at age 65 if their fund returns 9%. However, if the best they can do is 7% they will only have $961,000. That is a difference of $665,000 - just because of a better mix of assets inside the fund.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is firstname.lastname@example.org.