“I don’t want to invest into super. My friends lost money investing in super during the GFC.”
This was a conversation I was having with a new client this week. I regularly hear the fear from investors of not wanting to invest in superannuation.
This is due to a very common misunderstanding about what superannuation is. Superannuation is not an asset. Superannuation is a tax structure that allows you to invest your retirement savings into assets that are taxed at a lower rate compared to owning the assets in your own name.
The below table compares owning that same asset in your own name compared to owning exactly the same asset in your superannuation fund:
Asset Class | Personal ownership | Superannuation |
---|---|---|
Cash | Can be held in a cash fund, at call cash account or term deposit or term deposit. Interest taxed at your marginal tax rate (Up to 45% + Medicare Levy). | Can be held in a cash fund, at call cash account or term deposit. Interest taxed at 15% if you are still working and in accumulation phase. Interest is tax-free if your member balance is under $1.6 million. |
Australian Shares | Can be direct shares, Exchange Traded Funds (ETF) or managed funds. Dividends taxed at your marginal tax rate (Up to 45% + Medicare Levy). Capital gains are taxed at your marginal tax rate (MTR) – or 50% of your MTR if held for more than 12 months. | Can be direct shares, Exchange Traded Funds (ETF) or managed funds. Dividends taxed at 15% if you are still working and in accumulation phase. Dividends are tax-free if you are drawing a pension and your member balance is under $1.6million. Capital gains are taxed at 15% – or 10% if held for more than 12 months. No capital gains tax if you are in pension phase with a balance under $1.6 million. |
International Shares | Same as Australian Shares. | Same as Australian Shares. |
Property securities and direct property | Can be property funds, property ETFs, property trusts or direct property. Rental income taxed at your marginal tax rate (Up to 45% + Medicare Levy). Capital gains are taxed at your marginal tax rate (MTR) – or 50% of your MTR if held for more than 12 months. | Can be property funds, property ETFs, property trusts or if you have a SMSF direct property. Rental income taxed at 15% if you are still working and in accumulation phase. Rental income is tax-free if you are drawing a pension and your member balance is under $1.6million. Capital gains are taxed at 15% – or 10% if held for more than 12 months. No capital gains tax if you are in pension phase with a balance under $1.6 million. |
Fixed Income (e.g. Bonds) | Can be fixed income managed funds, fixed income ETF’s or direct bonds. Coupons/distributions taxed at your marginal tax rate (Up to 45% + Medicare Levy). Capital gains are taxed at your marginal tax rate (MTR) – or 50% of your MTR if held for more than 12 months. | Can be fixed income managed funds, fixed income ETF’s or direct bonds. Coupons/distributions taxed at 15% if you are still working and in accumulation phase. Dividends are tax-free if you are drawing a pension and your member balance is under $1.6million. Capital gains are taxed at 15% – or 10% if held for more than 12 months. No capital gains tax if you are in pension phase with a balance under $1.6 million. |
As you can see from the above, you are able to own pretty much the same assets in your superannuation as you do in your own name.
The difference is how the income and capital gains are taxed. Superannuation is clearly the winner for being a lower taxed environment.
However, you need to consider your age. If you are going to make additional contributions to your superannuation how long will it be before you have access to that money in a form of a pension from your superannuation fund?
For people in their fifties and sixties, making contributions to superannuation to help save for retirement makes sense. I generally tell clients that they need to be prepared to invest for a minimum five year time period before they anticipate needing access to that money again.
For a person in their twenties and thirties, locking up their spare savings by making additional contributions may not be the most appropriate decision for their stage of life.
Now that we have clearly understood that superannuation offers pretty much the same choice of assets to invest in as buying them in your own name, there are differences between what superannuation fund you may use. Your choice spans one of three categories:
- Industry superannuation funds
- Retail superannuation fund
- Self-managed superannuation funds
Each of the above choices will be able to provide your superannuation with an exposure to cash, Australian shares, international shares, property (direct property only for SMSFs) and fixed income securities.
This is where a financial planner can be very helpful in determining what type of superannuation fund is appropriate for you.
As a fee for service financial planner, I am paid by my clients based on time. Not based on funds under management.
If your financial planner does not include the consideration of industry superannuation funds in their recommendation (and ask them when was the last time they recommended an industry superannuation fund to a client and which one it was) they are not considering all options that may be appropriate for you.
It’s time to look for a new financial planner.
Andrew Zbik
Senior Financial Planner
Omniwealth
t: (02) 9112 4316
m: 0422 038 253
andrew.zbik@omniwealth.com.au
www.omniwealth.com.au