Super is a structure, a vehicle within which you can invest, and there are many compelling reasons to do so.
So why are so many Australians disengaged from their super? Perhaps it's a symptom of the super rules being so complex (this is a common reason), or perhaps it's a feeling of "no control"? I think we'd have to be honest here and throw apathy in the mix and the very unfortunate and too familiar attitude of "I can't have it now - so I’ll worry about it later".
Let's see if we can redirect your thinking.
Whilst super on its own won’t drive your investment returns, it definitely has the potential to improve them. Your returns will be driven by the investments you choose, more specifically the asset classes you invest in like cash, property or shares. Fees and taxes also matter and we will be talking more about these in future blog posts.
So superannuation is a structure, just like a Company or a trust is a structure, and each of these structures have their own rules and offer different tax outcomes.
Take Barry for example, his marginal tax rate is 38.5% (incl. medicare levy). He has $10,000 pre-tax income available for investment and he wants to invest defensively, targeting 6%pa. He can choose to do this inside or outside of super.
If he pays tax first and invests outside of super in his own name, he has $6,150 to invest on day 1. However if he salary sacrifices the $10,000 into superannuation, he has $8,500 to invest from day 1. Remember, he is investing in the same assets – targeting 6%pa. This means his super asset gets a head-start of more than 38% over his non-super asset and this advantage compounds over time.
Just last month, the current Assistant Treasurer and Minister for Financial Services and Superannuation Bill Shorten MP, addressed Financial Planning Professionals in Brisbane and discussed the impact of compulsory super savings in Australia. He said
“Superannuation savings in Australia are in excess of 1.3 trillion dollars, the size of our Gross Domestic Product. If the American economy had made the same decisions that we made, they would have had 12-13 trillion dollars in savings! The most recent turmoil in North America, I suggest to you, would have been far less drastic, their economic recovery far quicker, the problems they’ve had far more shallow, if they had that pool of national savings.”
We Australians are so fortunate.
Image: Salvatore Vuono / FreeDigitalPhotos.net