All this week in The Daily Reckoning, Meagan Evans and I have been addressing questions sent by our readers. Yesterday I introduced you to a time tested, low risk strategy for high return investing. Click here if you missed it.
Today I’d like to focus on superannuation. Specifically, whether you should contribute any extra salary into your super to take advantage of the tax breaks.
Tuesday’s release of the Financial System Inquiry Interim Report — or Murray inquiry — offers some relevant insight into why, in fact, you should not.
One of the recommendations made by the report is to mandate the use of ‘retirement income products’ like annuities. Annuities, by the way, pay out a stream of payments over time. If you think of your super as water in a bathtub, an annuity would be like allowing a fixed amount to trickle through into your cup each month.
Currently, you already have that choice. And it’s not a bad option if that suits your needs. But currently you also have the choice of dumping out the entire bathtub the day you reach the magic — and ever-changing — age when you’re allowed to access your super funds. It is your money, right? You worked your entire life for that payout. Whether you choose an annuity or a lump sum payment is no one’s business but your own.
Oh, and the government’s. They, of course, will be deciding how much water can trickle from your tub of savings into your cup each month.
Even before the release of the Interim Report, the mainstream press has been trumpeting that most Australians don’t have enough money in superannuation to fund their retirement. And this has the government running scared.
Why? Because Australia is ageing. The coming decades will see a surge in older people retiring, with fewer younger people paying taxes to fund their pensions. And if too many retirees leave the workforce without enough money put away in super, the pension burden will be crippling.
Now hopefully you’re not planning to depend on the rather meagre government pension to fund your golden years. But if you are, and you were born after 1957, you’ll be waiting until you’re 67 for your first payment — under current law. Of course, that’s almost certain to rise to 70…if not under this government, then under the next one. And if they can raise it to 70, why not 75?
The government, by the way, is also hoping you don’t come to depend on the pension. With the changing demographics, they simply can’t afford it. So what’s their solution? Ramp up your superannuation funds.
Under the Super Guarantee, your employer currently pays 9.50% of your salary into your super fund. This will gradually increase to 12% by 2022. That money’s locked in. You have a say in how it’s invested, but not how much. There’s not much you can do about it, except hope that someday some of it will come back your way.
But even with the increase to 12%, most Aussies will still find themselves falling back on the pension during part of their retirement years. According to Deloitte’s superannuation adviser, Wayne Walker, you should contribute at least 17–19% of your salary to super for 40 years while working, if you want to retire comfortably.
So what do the government, Deloitte, and the mainstream financial services recommend? Topping up your employer’s super contributions from your own salary. You’ve probably heard this called salary sacrificing.
At the moment, you can ‘sacrifice’ up to $150,000 per year. And this will likely go up to $180,000 next year. The incentive here is that the government offers you a low tax rate of only 15% on your ‘contribution’.
Now this doesn’t sound like bad idea, on the surface. But I put the commonly used industry terms ‘sacrifice’ and ‘contribution’ in quotes for a reason.
Here are a few synonyms for ‘sacrifice’: forfeit, surrender, lose.
And here are some for ‘contribution’: donation, gift, subsidy.
Interesting. Who do you suppose your hard earned, surrendered money is going to subsidise?
Make no mistake, the tax breaks the government offers you to put more money into super are nothing more than a well-baited trap.
Just as the pension age is going up — and up — so too is the age at which you’ll be allowed access to your super.
Under today’s rules, if you were born before 1959, you can access your super when you turn 55. This, by the way, is known as the preservation age, because the government generously preserves your money until then. But that’s already going up. If you were born after 1964, you can’t access your money until you turn 60.
And, also like the pension age, that’s almost certain to rise to 65. It’s already been proposed by this government in order to maintain the five year gap between the pension age and the preservation age.
If the government can move the goal posts this late in the game, who’s to say they won’t shift them again? It’s like dangling a carrot at the end of a stick to keep an old donkey plodding along. You keep working away, but that carrot never gets any closer.
Is it starting to sound less like your super yet?
Now don’t forget the annuity ‘proposal’ from the Murray inquiry. This ‘recommendation’ was echoed in the Deloitte’s Superannuation Report.
If you’re under 40, the government will almost certainly keep you from grabbing hold of that carrot once you hit the magic preservation age. Instead of giving you the entire carrot at once to do with as you please, they will generously continue to manage it until…well until you die. Until then, they will decide how much of that carrot to slice off for you each month. (Admittedly, Deloitte didn’t use the carrot analogy.)
But that’s not all…
The Deloitte report, certain to be scrutinised by the cash strapped government, also recommends taking any remaining super from you after you die. Rather than being able to pass this money — your money — on to your dependents or whomever you choose, this will go into a pension pool to fund the government’s pension scheme. That’s wealth redistribution at its finest.
And don’t think the way you vote will affect this almost inevitable outcome. This isn’t a Liberal or Labor issue. It doesn’t matter who’s sleeping in The Lodge. The writing has been on the wall for some time now.
Back in 2011, when Bill Shorten was the federal Assistant Treasurer, he had this to say (emphasis mine): ‘Over the long term, superannuation remains a solid investment. Moreover, Australia is better off as a nation with this trillion-dollar pool of savings than if we had to raise $1.3 trillion in taxes to fund our retirement.’
To steal a line from Monty Python’s Holy Grail, ‘Oh what a giveaway!’
Now, as I mentioned, you can’t do much about the fixed percentage of your salary that you ‘contribute’ to super each payday. (Although my mate and your regular DR editor, Nick Hubble, is working on ways to legally get this out of the country.) But you can control where you invest your extra savings.
If you want to sacrifice your money and contribute it to super, the government will give you a generous tax break today. (And, if I haven’t made my point yet, that generosity alone should raise suspicions.)
Or, if you want to keep control over your own wealth, you can choose to invest it wisely…well away from the sticky hands of federal treasurers. If you can leave it to grow until you turn 65 or even older, great. But if you do need it earlier for whatever the reason, then it’s there for you to do with as you wish, when you wish.
And when your time is finally up, it will be there to pass on to your kids, friends, or charities of your choice.
It’s your money, after all.
Chairman, Albert Park Investors Guild