No doubt ...... no doubt ....... the Australian Superannuation system has some terrific tax benefits both during accumulation phase and also during pension phase. The ability to salary sacrifice at only 15% tax during accumulation stage is wonderful as is the tax free earnings, tax free dividends and tax free capital gains events during the pension phase.
However, I'm still suspicious of placing all my eggs into this government regulated Superannuation system. Now, I am no finance man, I have no qualifications in this regard, so my following thoughts can only be fairly classified as a conspiracy theory - nevertheless, I see what I see.
Consider the following with regards to Superannuation:
1. Constantly changing rules and many layers of complexity
2. Your money is not truly accessible tax free before retirement preservation age.
3. Retirement age is getting older by law - (mine is now 67 !!)
4. No ability to access your money before preservation age (60 for me) without a huge tax bill
5. Most Superannuation funds have huge fees - as bad as most fat managed funds in many cases
6. Default Super options (the one that you automatically get if you do not choose) is usually a balanced fund with significant fees.
7. Very difficult to see where your funds are invested beside vague labels like "Australian Shares" etc
8. Not everyone can choose a fund of their liking depending on their employer.
9. Fees are often hard to understand and can be recorded (hidden!) in several scattered places across PDS's (Product Disclosure Statement).
10. Administration fees during retirement or pension phase are often many times greater than when in accumulation phase.
11. Life insurance within Superannuation can be very tricky to access in a variety of scenarios and can sometimes be taxed.
12. Transition to retirement (TTR) tax rules have recently been introduced into Superannuation which do not benefit the retiree.
13. Maximum limits on pension phase accounts have been introduced and changed recently.
14. Before and after tax contribution limits have been changed for the worse too.
15. Thresholds have changed and many pensioners have had their aged pensions drastically reduced simply because they were good savers and used Superannuation the way they were historically told to. A nice reward for doing the right thing - not!
16. What future changes will the government make to Superannuation? It is a complete unknown. Therefore is my money predictably a proper investment in Superannuation?
17. Will Superannuation taxation structures and rules change? If so, this could completely compromise your retirement plans.
18. Cyber risk to Superannuation funds is a hush-hush topic
19. How will future legislation impact on Superannuation? Given the long list of legislative changes directly impacting Superannuation over the years, it is reasonable to assume that this trend will not change.
20. The younger you are, the less appealing Superannuation is as legislative changes across the next 30 or 40 years could massively change the intention and viability of Superannuation in much the same way as the aged pension has gone from being a wonderful innovation generations ago, to now being a pittance that is mockingly referred to by many as a charitable or social security payment.
21. I challenge you to easily read and understand your superannuation yearly statement (!)
Look, in Australia our employers are obliged to contribute 9.5% of our gross salaries into a Superannuation fund for us. We have zero say in this. So my approach is that I have chosen not to add any extra than this obligatory 9.5% because we plan to retire from our current paid work before our preservation ages and thus we will need plenty of funds invested and accessible outside of Superannuation for this purpose.
So because I have to get the best out of my obligatory Superannuation account, I have therefore researched scores of Superannuation PDS's (product disclosure statements - gosh they are so freaking boring) and have chosen a Superannuation fund that offers a Balanced Index Fund charging only 0.02% fees plus a $78 yearly admin fee. This Superannuation fund also offers a very low cost self-managed investment platform where I can choose a reasonably good selection of ETF's, LIC's, individual stocks, bonds and term deposits to invest into directly. The proviso is that only 80% of my funds can be invested via the self-managed platform and the other 20% needs to be in the Indexed Balanced Fund option - but that is OK. The other pleasing (and rare) thing about this Superannuation fund is that once I am allowed to retire and change my accumulation account across to a pension account, they will allow me to transfer all my stock holdings across to my pension account as a once-of transaction without the need to sell all my holdings which would normally trigger a massive capital gains tax event - this is pretty good.
However, outside of Superannuation we will continue to stick to our personal budget to invest 20% of our net incomes into tax efficient investments (namely investments that are 100% franked). Fortuitously, under Australian law, the company tax of 30% paid by the company on its 100% franked dividends does not need to be double taxed by the owner of the shares and thus can be used as an efficient tax claim at tax time each year. e.g. for low income earners, they will get a tax rebate on their 100% franked dividends and for high income earners they will only need to pay the difference between the 30% tax already paid on their dividends and their particular tax bracket. Australian shares also generally pay slightly better dividend percentages than international stocks. Because of the lower immediate tax advantages but higher growth trends of international stocks (USA, Europe, Asia etc) I use my Superannuation to buy international growth ETF's and stocks thus taking advantage of the generous tax rules within Superannuation to diversify my holdings outside of the tiny Australian stock market whilst my ex-Superannuation investments are all Australian investments specifically geared to be tax friendly.
When we eventually decide to pull the ribbon out of our typewriters for the last time, we will first use our investments made outside of Superannuation as an income stream to tide us over the decade or more before we are allowed by the government to access our Superannuation funds.
Anyway, make sure you thoroughly check everything I have said because I am not a qualified finance person and may well have got it all badly wrong ..... (but I doubt it). I am only sharing this information for the purposes of encouragement and open, honest discussion about the often taboo subject of money and investments - this post is obviously not qualified financial advice. Always do your own homework.
Take care folks and stay nice.
Mr HM (Phil)