Does your superannuation still stack up?

Investing in superannuation may have lost some of its gloss, but the tax advantages mean that it is still an attractive option.

A couple of years ago, when the sharemarket was rising rapidly, superannuation seemed like a foolproof way to fund your own retirement.

Returns were high and the tax advantages were considerable. Now that returns have been affected by the market downturn, some investors may be questioning whether it is still a good idea to put extra funds into super, or just stick with the compulsory 9% employer contributions.

Buying at the bottom

No-one can predict exactly how long it will be before the market recovers, but you will want your superannuation to be positioned in the best possible way to benefit from a recovery. And in the share-market at the moment there are quality stocks going ‘cheap’, which means there could be buying opportunities to be had.

As the chief executive of the Association of Superannuation Funds of Australia, Pauline Vamos, says “People are doing it tough, but other costs are coming down and you’re buying at bargain basement prices if you put money into superannuation now”.

The tax advantages are numerous

To encourage people to fund their own retirement, the Government has in place a number of benefits designed to make investing through superannuation as attractive as possible.

Here are a few of the tax advantages:

• Once you reach age 60, there is no tax on any money you take out of your superannuation funds.
• If you convert your superannuation to a pension, you do not pay any tax on the investment earnings in your pension account.
• If you earn $31,920 pa or less in the 2009/10 financial year, for every after tax $1 that you contribute to superannuation the Government will cocontribute $1.00 up to a maximum of $1,000. People earning up to $61,920 pa in the 2009/10 financial year can also benefit.(1)
• Investment returns within superannuation are taxed at just 15%, unlike most investment returns outside superannuation, which can be taxed at up to 46.5%.
• You don’t pay income tax on amounts you salary sacrifice to superannuation. Instead, your superannuation contributions are usually taxed at 15%, which can be much less than your marginal tax rate. In addition, you may pay a lower rate of income tax if your salary sacrifice reduces your remaining salary so it falls into a lower income tax bracket.(2)

Things to consider for your superannuation

No minimum amount is required to add to your superannuation, but you should consider the tax implications and contribution caps that may apply, as well as your personal circumstances and objectives. Your financial adviser can help you with this.

How much superannuation is enough?

Although this is very much an individual assessment, research from the Association of Superannuation Funds of Australia indicates that a couple will need to spend $50,0863 per annum, in today’s dollars, to live comfortably in retirement.

Based on estimates, this means a couple would need a combined superannuation balance of approximately $762,000 (in today’s dollars) to live comfortably for 20 years of retirement.(3)

Contact xLife to request superannuation advice or call us on 1300 135 205 if you would like to discuss superannuation contributions, self employed superannuation or if you would like help to find your lost superannuation, and also consolidate your superannuation funds.

Source:
1. These thresholds apply to the 2009/10 financial year and are indexed annually.
2. If the total of your salary sacrifice, Superannuation Guarantee and other employer or personal deductible contributions exceeds your concessional contributions cap, you may be liable for additional tax of 31.5% on the excess contribution. For the 2008/09 financial year the concessional contributions cap is $50,000 for those under age 50 and $100,000 for those aged 50 or more. You may also be liable for additional tax of 31.5% if you do not provide your Tax File Number to your superannuation fund provider. You should also consider the non-concessional contribution cap if you make other types of contributions to superannuation.
3. Colonial First State Assumes an annual earning rate of 6% after fees and taxes with annual pension payments of $50,086 indexed to inflation at 3% pa over 20 years of retirement. Excludes any Government age pension entitlements. A change in one or more of the assumptions will produce different results.

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February 2010