Don’t give up on super

Generation X must keep faith in superannuation, despite the constantly changing rules.

Summary: Many members of Generation X feel they are getting a raw deal on super as possible changes to the goalposts are discussed. But super is always likely to be more lightly taxed than assets held in your own name.

Key take-out: Even if you have no faith in super, there are three things you should do right now: do a risk profile, contribute extra and build wealth outside of super.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

There is probably no generation that has a bigger right to feel disillusioned about superannuation than Generation X (those born from around 1965 to the early 1980s and aged between their 30s and around 50 now – not to be confused with boomers who were born between 1946 and 1964 and are now aged between 51 and 69).

Superannuation was, to a degree, designed when it was accepted that the generation(s) following the Baby Boomers weren’t going to be big enough to work and pay taxes to run a country and support Boomers as they aged.

Super, it was hoped, would eventually take the pressure off several generations of workers by getting more employers and employees to contribute to future workers’ retirement incomes. It just so happened that Xers fell in the middle – they had to forgo pay rises, while the Superannuation Guarantee limit was introduced and lifted, to put money into super, and will also need to support Boomers with tax as they age.

This is the base underlying assumption/concern for all discussions in regards to the affordability of super as it currently stands.

As further refinements to the superannuation master plan are required, the negative longer-term changes that are currently being bandied about would impact on Xers, or are impacting them. These include contribution limit reductions (previous generations could put, tax effectively, up to $100,000 a year or more into super), plus extension of the government pension age to 67 or maybe soon to 70.

Most changes will have less impact on those older than, say, 50 or 55, who are closer to retirement and have largely made their retirement plans. Governments will either shield them specifically from law changes, or soften the blow of changes to their plans.

Xers feel that they are getting a raw deal. Though not explicitly described, this is the basis of an article that appeared in The Australian on Saturday by John Ferguson and Rick Wallace: “Gen X resigned to the constantly changing goalposts”.

Members of that generation – of which I am one – aren’t close enough to retirement as to be intimately considering their super on a daily, weekly, or even monthly basis.

They don’t have enough in super to really be caring that much (though that’s not an acceptable excuse for their lack of concern). And politicians, knowing that Xers have, on average, some decades to retirement, believe that they, as a generation, have time to make suitable adjustments to their retirement plans to counteract changing rules.

Changes can be made to the retirement goalposts of Xers where it is too far for them to feel like they have been immediately affected. There’s also a fairness element – if you HAVE been planning for your retirement for the last 10 years or so, as Boomers have, then changing the rules with immediate effect to all is unfair.

The problem is, as always, how constantly they have been changed.

Xers, I implore you, do not give up on superannuation.

Why?

There is one (almost certain) truism about super: It is always likely to be more lightly taxed than income and assets in your own name.

If it weren’t, superannuation would lose its final appeal. Who would lock up money in superannuation for decades if there weren’t that benefit? If they taxed members at marginal tax rates, there would be no compelling reason to put any money into super.

Superannuation is, at its most basic, an agreement from government that it will more lightly tax income that you have foregone for your retirement.

Whatever changes governments make to your super, even if they lift the internal taxation to something more closely resembling your “marginal tax rate”, they will always tax it less than your normal earnings.

Therefore, putting money into super for your retirement is likely to be less taxed on the way in, less taxed on earnings while in super and less taxed on the way out when paid as a pension.

That’s no guarantee. But whatever changes are made to the superannuation system, the above is likely to continue to be a fact of super. And given that most of you, as employees, will always have money paid into super, you might as well do the most to grow what is being put in there, that you can’t touch, as best you can.

Even if you have no faith in super, or would like to defer considering super until later in life, there are three things that you should do. Right now. As a guide, these three rules are:

First, do a risk profile. However it turns out – conservative, balanced, growth, etc – consider investing your super a little more aggressively than your risk profile suggests you should.

Second, build wealth outside of super, whether that is property or shares, or simply advancing payments on your home loan, so that it is paid out earlier and you can start building a non-super investment portfolio (of property or shares).

Third, contribute extra to super. Now. At least a little bit. You are swapping a 15% super contributions tax now for your current marginal tax rate. We don’t know what the concessional contributions rates will be in the future. But I do know this – the rules for super will change in the future. Nothing is more certain. Getting money into super at a low tax rate will give you more money in super to compound over the next decade or two or three to grow for your future.

Making super work smarter

Interestingly, a Generation Xer who hasn’t lost faith in superannuation was sitting across the table from me this week. She asked me a question I’d not been asked before.

“I’ve got a load of long service leave up my sleeve. I don’t need it all. I could never take that many holidays from my job, nor would I want to. Is there a way I can make it work smarter? Can I put it into superannuation?”

The answer is, technically, no. Under the superannuation salary sacrifice rules, you can only sacrifice income not yet earned. The LSL has already been earned, it just hasn’t been paid.

However, this person can achieve what she is interested in achieving, with a willing employer (employers do not have to offer salary sacrifice to staff).

While she can’t salary sacrifice the LSL into super, she can get paid out her leave, then salary sacrifice her normal, ongoing salary into her super fund to achieve the same result.

Let’s assume she’s earning approximately $100,000. She wants to tip about five weeks of LSL into super, or roughly $10,000 into super.

She could go to her employer and request to be paid out holidays/LSL to that amount. Then she could salary sacrifice her next five weeks pay into her super fund.

There would be a cash flow issue that she would need to cover, in that the paid out LSL would be taxed at 39%, probably on the entire amount. But the cash-flow requirement would only probably be a few thousand dollars. She would pick up what she shouldn’t have paid in her tax return.

The advantages? What went into super would only be taxed at 15%. If she got paid out the holidays, she would be taxed at 39%. Of the $10,000, she would have $8500 going into her super fund and earning for her for the next 20-odd years, paying tax on earnings at only 15% and building for her future.


The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is managing director of Bruce Brammall Financial. E:bruce@brucebrammallfinancial.com.au. Bruce’s new book, Mortgages Made Easy, which includes a section on SMSF geared property investments, is available now.

  • Superannuation should be seen as a way to fund retirement, not as top-up to the age pension, says new Financial Services Council chief executive Sally Loane.

Lifting the age of super access to 65 would keep people at work longer and boost their retirement savings, she said in her first speech since joining the organisation, The Australian reports.

Loane said 56 per cent of Australians expected to have an age pension after they retired, but the figure was lower for those aged in their 30s and 40s.

  • Treasury’s estimates of tax revenue foregone from measures such as superannuation tax concessions are not intended as a “policy message”, Treasury executive director, revenue group, Rob Heferen says.

“Some have suggested simply because there is a large measured expenditure, government should necessarily do something about it,” he told the SMSF Association conference, it was reported.

“That is not the case. There is no policy message whatsoever in the tax expenditures statement,” he added.