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Michelle Bromley CFP®, Director – Strategy and Advice

Most Australians who’ve been in the workforce at some point since compulsory superannuation was introduced in 1992 will have some super.

In this article, we will consider the benefits of superannuation and whether investing in your own name or via an internally taxed investment might be an alternative.

The case FOR super

Superannuation is currently the most tax-effective investment structure and enables retirees to draw an income stream that is flexible above a minimum required level.

Super is at the core of the Australian Government’s ‘three pillars’ approach to retirement:

• The Age Pension set at roughly 25% of male average weekly earnings, as a failsafe
• Compulsory superannuation contributions, currently set at 9.5%pa of employee earnings
• Voluntary superannuation, encouraged by tax deductions and offsets for some contributions

There are, arguably, many advantages of saving for your retirement via superannuation:

• Benefits are received tax-free from age 60.
• No need to lodge a tax return if you’re receiving a superannuation income stream but don’t receive other income.
• Automatic income stream reporting to Centrelink each August and February (but not if paid from an SMSF).
• Investment earnings during the pension phase are not taxed.
• Investment earnings in the accumulation and Transition to Retirement phases are taxed at a maximum rate of 15% (and 10% for eligible capital gains).
• Contributions made to superannuation may attract tax deductions, tax offsets, or the Government co-contribution.
• Low income earners receive a boost to their super of up to $500 under the Low Income Superannuation Tax Offset.
• Term life and Total & Permanent Disablement insurance premiums are tax deductible within super, whereas there is no tax deduction if held in your own name.
• Super benefits are protected against bankruptcy (unless you knew that you were headed for bankruptcy and made the transfer to defeat your creditors).
• Minimise the risk of a challenge to your Will by using a Binding Death Benefit Nomination to make sure your super goes to your spouse or children when you die.
• A wide range of investment choice to suit your needs, from diversified managed funds, to shares, cash and deposits, and even commercial or residential property.
• Superannuation benefits in the accumulation phase are ignored by Centrelink if you’re under Age Pension age (age 66 and rising to age 67 by 1 July 2024).

Tip: A common strategy to maximise Centrelink benefits between couples is for the Age Pension age spouse to cash out tax-free benefits as a lump sum that is gifted to their younger non-Age Pension age spouse, who uses those funds to make a superannuation contribution and holds those benefits in accumulation phase until they too reach Age Pension age.

The case AGAINST super

The complexity around the ever-changing superannuation rules and regulations can make it difficult for the average person to understand superannuation and what its attractiveness might be.

It’s a commonly heard argument, that the Government keeps changing the rules and one day they’ll just confiscate our hard-earned dollars.

However, that won’t ever happen because our superannuation balances are protected under the Superannuation law and under the Constitution of Australia.

One of the ways our superannuation is protected is that the money is held in trust by a regulated trustee, and most of us can exercise control over which trustee is managing our super account.

However, there are some attributes of our superannuation system that might mean you require additional financial planning advice depending on your circumstances

• A superannuation fund is a type of trust and you are a beneficiary of that trust. There are special laws to protect benefits in a super fund, meaning you can’t just access the funds as needed – you generally need to be at least age 58 and retired (rising to age 60 from 1 July 2024).
• Prior to age 60 conditions of release are limited, for example, if you fall on hard times you must be receiving Centrelink payments for six months before you can access a maximum of $10,000.
• Super funds generally involve management costs over and above those you might pay if you were investing directly. However, professional investment management costs may be worthwhile if you don’t have the knowledge and expertise to invest by yourself.
• On your death, your super can generally only be paid to those individuals identified in the super legislation as ‘dependents’ like your spouse and children under the age of 25. While you can direct benefits to your estate and then pay out to non-dependents, this attracts a death benefits tax of 15% (plus Medicare) on the taxable component of the death benefit and potentially puts those funds at risk of an estate dispute.
• As our superannuation and tax systems have evolved, the Government has made changes to reduce the superannuation tax concessions provided to wealthier Australians by restricting the amount an eligible individual can contribute to super to $25,000 pre-tax plus $100,000 post-tax each year and capping the amount that can be converted to pension phase to $1.6 million per person ($1.7 million from 1 July 2021).

There is always the possibility of further and as yet unknown changes in the future. However, remember that superannuation is a key component of the Government’s retirement income strategy that saves our country billions each year in social security payments and improves the standard of living of retirees, so any future changes aren’t very likely to be too restrictive.

What are the Alternatives to Super?

There may be personal circumstances where contributing more to super isn’t possible, or where directing funds outside the superannuation system is preferable.  For example:

• Focus on paying down debt first (and not acquiring new debt to add to your burdens!). Peace of mind that you own your home outright is worth more than gold.
• If you’re still years away from being able to access your super, build up a cash nest egg that you can easily draw on if you fall on hard times (and don’t risk it in the share market chasing higher returns!).
• If your marginal tax rate is below 32.5% you can consider investing in your own name, or in the name of a non-earning spouse. 

Tip: If you’re on lower marginal tax rates and are eligible for the Low Income Tax Offset and/or Senior And Pensioners Tax Offset it may be just as tax efficient to invest in your own name as investing inside super – although you’ll need to lodge a Tax Return to access those tax offsets and if you’re receiving Centrelink payments like the Age Pension you’ll have to report changes to your investments to Centrelink.

• Perhaps you’ve already maximised your super contributions and you’re paying tax at or above the 32.5% marginal rate. Consider investing via an insurance bond which is internally taxed at 30%. 

Tip: Insurance Bonds are not only tax effective, but they are also particularly useful for estate planning or benefiting grandchildren as you can nominate a “life insured” and one or more “beneficiaries” to make sure your wealth is directed exactly per your wishes. Amounts withdrawn after 10 years or paid out on death of the life insured are received tax-free.

• More complex vehicles, like private companies and discretionary trusts, are generally suitable for higher net wealth individuals. This is because the cost of administering and accounting for private structures can be cost prohibitive for smaller investment amounts.

So… Super, Yes?!

Absolutely, yes. I have a lot of faith in our superannuation system and, because it’s so tax effective, it’s the main vehicle that I use to save for my retirement.

Like Aesops fable of the Ants and the Grasshopper, I’m a good little Ant who has started storing extra away for winter (or summer…I hope to retire somewhere fine and sunny!).

The Age Pension will still be around in 20 years’ time when I hit ‘pensionable age’, as Australia will always need social security as a failsafe, but I want to provide myself a better standard of living.

There simply isn’t another vehicle that provides a tax deduction on the way in, caps tax payable on investment earnings at 15% on the way through and, once you’re eligible to access, is tax-free on the way out!

To speak to our client services team, please call 1800 064 959 or click here to contact us.

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.