Why a super mindset change is needed

Just contributing concessional payments into your super is not enough. You should also be putting in tax-paid funds.

PORTFOLIO POINT: Getting the most out of your super in the pension phase means putting away more beforehand. On top of your concessional contributions, putting in tax-paid funds is a must.

I want to start the new financial year with a commentary about superannuation contributions.

As we all know, if you are aged 50 the amount you can contribute to superannuation and gain a tax deduction from falls from $50,000 to $25,000. At that level it will go nowhere near financing your retirement requirements.

Treasury has opposed superannuation at every turn and when Peter Costello made nil tax on superannuation pension payments and tax levels for those over 60 it horrified them. They have responded by making it harder to get money into superannuation. So that simply means that you must look at your superannuation contributions as an allocation of tax-paid funds. You are allowed to contribute $150,000 out of tax-paid funds into superannuation plus another $25,000 to gain a tax deduction.

I realise this level of contribution without tax relief will stretch many people but contribute as much as you can because once you are aged over 60 (see below) you can put your superannuation fund to pension mode and your investment returns become tax free.

You will find untaxed savings will increase at a much faster rate than where there is a tax burden. And tax-free superannuation pension payments are a joy. If you want to work the tax burden of work is greatly reduced because the pension income is not included the equation.

Because we are all used to viewing superannuation as a tax-deductible contribution there is a difficult mindset in seeing it as an allocation of tax-paid funds but it is a mindset change that simply has to be made. And remember, the actual attraction of superannuation is now so much greater that in fact, in most circumstances, you win.

In all the commentary that I have seen about the coming year, most observers are saying superannuation holders need to scale down their expected returns. This is a disturbing thought for many because projected pensions have often been calculated on the basis of returns of between 6% and 7.5%, and sometimes higher.

Such a downscaling is understandable given that term deposit rates have fallen to around 5% and the sharemarket has not provided any joy for a long time. The only point I would make is that sharemarkets can often surprise both in the upside and the downside. I remain wary about the longer-term sharemarket but I think we could see a continuation of this current run-up for longer than many expect, although of course there are no guarantees.

Germany took an incredible step at last week’s summit. The German Chancellor Angela Merkel virtually committed the savings of Germany to save southern Europe. In those early morning sessions it became clear that unless she did this the European dream would collapse and there would be a split in Europe. I would argue the cost to Germany of holding the European common currency together is worse than letting it split. But she couldn’t bring herself to break up the euro. There are various let out clauses in the summit agreement and it is even possible that Germany may have to go to a referendum.

Merkel has headed the German nation on a saving Europe path. And so in the next few months we will have more of the Greek crisis and the odd Spanish or Italian crisis, but while the German funds are available they can be overcome. But there is a very serious longer-term problem. Germany actually has a high debt but has enjoyed low interest rate borrowings for a long time. In the next year or two, on my simple sums, the Greeks, Spaniards and Italians should be able to chew up the German money that hasn’t already been committed to their welfare. That means that by about this time next year Germany will be downgraded or will be struggling unless there are really meaningful reforms in these southern European countries.

I suspect that is not possible because austerity has already crippled them and it is not politically possible to tighten the screws much more. Worse still, in countries like Greece they haven’t tightened the screws to anywhere near the level that they agreed to do. At some point the Germans will realise the implications of what Angela Merkel agreed to, but at this stage I don’t think they understand.

I suspect we will have our greatest crisis when Germany runs out of money. It is possible that crisis will take place in 2013--- the first year of the new American president. Whether that president is Obama or Romney, he will face the congressional wars requiring dramatic falls in government spending which potentially will snuff out what is clearly a recovery in the US.

But in the current environment we are seeing a clear lull in European problems and at least some signs of recovery in the US given the housing market. In addition China is now talking about a further stimulation. These are the elements that all recoveries are made of. It is of course always possible that China will not stimulate or the Germans will baulk at saving the southern Europeans and that may bring on a new crisis, but there is a reasonable chance of better returns in the next few months.

You should also not forget that the overall Australian economy is not falling out of bed. It is true that margins are lower and there will be a fair bit of retrenchment activity in some areas. But overall demand is not too bad and employment is holding, helped of course by the mining projects. It is possible that we might have a benign period in the next few months.

Note: The age when you can access your super benefits needs to be checked with your advisor. The preservation age will rise from 55 to 60 between 2015 and 2024. This will mean that for someone born before July 1, 1960 their preservation age is 55 years, while for someone born after June 30, 1964, their preservation age will be 60.

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