The rules governing superannuation are in a constant state of flux because the government changes the legislation regularly, using it as a political football. So it’s no wonder people have a lack of understanding or interest in how it works. But it’s important to pay attention to your superannuation because it can provide you with tax-free income when retire.
Superannuation is the best tax environment that we have to invest in. As long as you’re paying some tax – even if you’re earning just $25,000 – you’re often better off putting some money into superannuation. So it makes sense to engage with your superannuation and make sure it’s invested appropriately for you.
Managing your superannuation can make a difference of hundreds of thousands of dollars to your retirement. But instead of actively managing their super, many Australians think their mandatory employer super payments of 9.5% will be sufficient for their retirement when it probably won’t.
So how much superannuation do you need? Well, it really depends on what sort of lifestyle you want to have in retirement. Everyone’s got different income needs and aspirations, so the amount of money you need in retirement needs to match your goals. Some studies indicate that superannuation contributions should be as high as 17% to safeguard retirement. That means you need to be putting aside that much over your whole career to match your future with your current standard of living, but it really does vary on a case-by-case basis.
While people have different lifestyle goals for their retirement, the risks involved with not taking super seriously remain the same for everything. If you leave your superannuation defensively invested for 20 years, you could end up with around 4% or 5% lower return on your money than if you had been actively engaged in how it was invested. So it can be worth taking a bit more of a risk with your superannuation.
By actively engaging with your super, you can also potentially pay less tax now and in the future. The current superannuation structures that we have in Australia mean that many people should be paying very little tax, if any, outside of their salary by the time they hit 60. But to do this does require some planning.
The first thing to consider is how much of your salary is going into superannuation. Next, think about how it’s being invested, and whether you’re comfortable with the investments held within your superannuation. Thirdly, consider strategies for increasing the amount you put into superannuation, whether it’s through salary sacrifice or contributing assets that don’t currently sit in superannuation.
Self-managed super can be a good option for highly engaged people but it certainly isn’t for everyone. Whether you choose this path really depends on the type of assets you want to hold in superannuation. A self-managed super fund has the greatest flexibility, because it can hold things like business assets and property. But it’s important to work out whether superannuation is the best structure for you to hold these assets, or whether it’s better for you to hold them in your own name or in an alternative structure, like a family trust.
The best advice I can give anyone about super is to take a greater role in understanding how it’s invested and where.
James Williams is an Executive Advisor at Viridian Advisory
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