Super charged

PORTFOLIO POINT: It’s time to review your super contribution strategy to make sure you’re taking full advantage of entitlements.

With three months to go before June 30, now is a good time to look closely at your superannuation contribution strategies.

So let me share with you some of the strategies I adopt, because they may influence your decision-making patterns. First of all, for anyone over 50 who is earning good money, the $50,000 contribution entitlement for the year ended June 30, 2012 is an opportunity too good to miss.

Next year, 2012-13, that entitlement falls to just $25,000, so for people aged over 50 it is worth making whatever personal financial adjustments are required to take up the $50,000 entitlement in 2011-12. I will discuss the position of people aged under 50 later.

Now, there is an important qualification to this. If you have less than $500,000 in your super fund, you can still contribute $50,000 (tax deductible). But remember, the bare minimum you need to retire on and maintain a middle-class standard of living is $1 million (ideally, you need more). So the sooner you get started on bridging the gap between $500,000 and $1 million, the better, because with only $25,000 allowed to be contributed (tax deductible) after you reach $500,000, it will be hard work. Of course, I fully realise that many people with less than $500,000 in their fund cannot raise the capital.

Those with the available funds can contribute $150,000 a year in after-tax income. There is no tax deduction on this contribution. Many people ignore that $150,000 'entitlement’. Others simply don’t have the money to make that sort of contribution.

But if you are approaching 60, then the benefits of superannuation are so enormous that if you possibly can, you should take up your $150,000 entitlement. Now, for some it can be advantageous to contribute three years’ non-tax deductible entitlement – i.e. $450,000 – which is only available to people aged under 65.

The advantage of taking up that entitlement is that your savings in superannuation are only taxed at 15 per cent. And if you are aged over 60, and you switch your fund to pension-mode, the income on the savings is tax-free.

As we all realise, the taxation regime of superannuation is vastly superior to that which applies to ordinary individuals and companies. The problem is that, except in exceptional circumstances, you can’t get access to the money until you are 60.

And if you are younger, then you may have mortgage and other commitments which make it difficult to contribute to superannuation on a large scale. Yet once you are aged 60, it is possible to take out a lump sum (although there are limits) and you can award yourself a pension. All of this is tax-free, so superannuation becomes a far more liquid proposition. I would argue that – if you possibly can – it is better not to take your money out of superannuation when you reach 60, because it is so hard to get the money back in again and you will need those funds if you live into your 70s and 80s. But some people are not in that position.

You will notice with superannuation I use the word 'entitlement’, and I must underline this word. The tax benefits of superannuation to people as they approach 60 are very generous, and in all the superannuation debate there has been no suggestion that those rules be changed. You therefore have an entitlement that – if you can’t take it up or choose to simply forgo it – cannot be replaced. It is almost like an airline seat.

People of my vintage were able to contribute to superannuation on a much larger scale than is now allowed. And so in my senior executive years, I was not burdened with anything like the restrictions that currently apply to the amount of money you can put into superannuation. In those days, the word 'entitlement’ did not really apply to superannuation contributions.

I must say that now I have passed my 70th year, I am able to draw a pension from my main superannuation fund and can contribute to a new fund from my earnings. (For most people, there is no necessity to have two funds. The one fund can pay a pension and make contributions.) It is likely that more and more people are going to be like me, and work into their 70s in a way that they never anticipated a decade ago, or even five years ago. Superannuation therefore becomes a magnificent savings vehicle. And so every year I do my best to take up my contribution 'entitlements’. As I understand it, those 'entitlements’ cease once you become aged 75 and you can no longer then put money into superannuation. And I guess that is fair enough.

Many people, when they retire, think that their whole superannuation life is going to change. The simple fact is that as you get into your 60s and 70s, you will normally take a less aggressive equity stance than when you were in your 40s and 50s; that certainly is the case with me. Equities have been a magnificent contributor to my retirement funds, but as I got older, I became more cautious and lowered my equity content.

When I talk to younger people, I point out that when I was in my 30s, 40s and indeed 50s, I adopted a very aggressive equity stance, because I was building up my funds and I knew the only way to do that was by equity investment. And so it is important to realise that the investment strategy suitable for one person can be very different to the investment strategy of another. (Next week, I return to this subject of exposure to equities.)

But where all ages unite is that superannuation is the most tax-effective investment vehicle around for people who are earning salaries or contract income. For those people who own a business, they may be able to contribute money to superannuation, but very often their spare funds are required to invest in the business. And if the business does well, this is a very satisfactory situation. I always feel for people who have spent their life building up businesses, but when they get to 60 they find that those businesses don’t have a ready market value and so they are left with less retirement savings than their work and efforts deserve. And so for some people who can see this happening in their life, it might be important to look at an alternative strategy before it is too late.