I read with interest (get it) a recent article in the Herald Sun, Superannuation funds climb by double digits in the 2013-14 financial year. While the median return on a balanced fund is estimated at about 13% for the 2013-14 financial year, some top funds should see returns of up to 16%. Coupled with a 15.6% return the previous year, it’s an outstanding return in anyone’s language.
Two years of double digit returns for super funds is great news for pretty much all working Australians, as we all benefit personally. And with some commentators predicting the Age Pension to disappear within the foreseeable future, meaning we need to prepare for fully funding our own retirement, it’s even more important.
But amidst the good news, I got annoyed. The media are in a hurry to tell us (screaming, from the front page) when the stock market is falling, or when super fund returns plummet; but you have to find a small article hidden between the weather and cartoons to read that the sharemarket and super fund returns are flying.
For the record, here’s a summary of super fund performance over the last few years (including an estimate of the 2013-14 financial year):
Superannuation returns for Growth funds (61-80 per cent growth assets)
Per cent return per financial year
Source: Chant West
The GFC struck in the 2008-09 financial year, when super funds lost on average 13%. Excluding that outlier, the average return over the last 5 years is 10%. Anyone who heeded the panic created by the media and took their money out of super or shares after losing 13% in 08-09 would have missed out on 5 years of upside. Playing it safe and going to cash would have only yielded 3% at most – a far cry from 15.6 and 12.9 over the last two financial years.
That’s why it’s critical you get both sides of the story. I’m really big on improving the financial literacy of Australians. Understanding what’s actually going on, rather than believing everything you read or hear, is crucial if you want to make smart decisions that will benefit you in the future.
(I was asked on SEN116’s The Run Home recently: ‘If we can’t believe everything in the media, where should we get our information from?’ A great question. My answer is always turn to an expert. Just as you employ a plumber so you don’t need to keep up with all the latest pipe technology, it’s arguably more important to get expert guidance from a quality adviser for major financial decisions.)
Back to super.
Super is a tax structure – NOT an investment
A critical aspect that many people overlook is that primarily, super is a tax structure – NOT an investment. Super is not ‘the sharemarket’ – sure, a lot of super funds are invested in the sharemarket, but most funds are expertly managed, meaning they’re diversified between Australian shares, overseas shares, property, blue chip (stable and reliable – but more expensive) shares, and cash. Your investment risk profile will dictate which mix of these is right for you, and most super funds give you a lot of choice regarding how your super is invested.
(Always get expert advice tailored to your specific situation before taking any action.)
Attractive tax rates
The key reason super is such a great option is the attractive tax rates. In accumulation phase (while you’re working), you only pay 15% tax; in pension phase (when you are over the superannuation preservation age – 60 years for those born after 1 July 1964) it drops to 0%. With many Australians paying 34-38.5%% tax, super is around ½ or 1/3rd of your normal tax rate.
It’s your money – so it deserves a little respect!
Super is money put away on your behalf by your employer that you can’t touch for a set period of time – until you retire (which could be as late as 70 as flagged by the current debate), or when you die (whereby it’s paid to your dependents). It’s locked away in a highly regulated environment that’s geared towards getting the right mix between maximising returns and protecting your cash (depending on your risk profile), so you can benefit from compound interest over a long period of time. That way, we can all pay our own way in retirement (rather than rely on the Government of the day).
Any time someone takes 9.5% of your salary, you’d be keen to know what for. Well, that’s how much your employer is required to deduct on your behalf – it’s a significant amount! For most people, super will be their second biggest asset (aside from the family home)… so it deserves a little attention and respect.
The more we earn, the more we spend… so take it off yourself
Salary sacrifice is a great way to beat the ‘more we earn, more we spend’ trap. It’s the ultimate form of taking it off yourself… which you’ll thank yourself for in the long run, when you’ve had ten, 20, even 30 years to let it compound.
The rise of Self Managed Super Funds (SMSFs)
For some Australians, SMSFs offer many attractive advantages that make them highly compelling. Predominantly, you can take control of your own super and manage how it’s invested. There are many rules to ensure your SMSF contributions remain protected, but to a large extent you get to manage your own investment – meaning you can invest elsewhere other than the sharemarket. Many Australians now set up SMSFs so they can invest directly in property. If you meet certain criteria, it’s an option well worth getting expert advice about.
This blog contains general advice only – you shouldn’t take any specific advice based on it. Always speak to a qualified Financial Planner before making decisions about your super or investments.