Superannuation and retirement planning strategies discussed
Is Superannuation still the best retirement planning strategy?
The government announced significant tax changes in the 2016 Federal Budget. Stuart Christie, Accumul8's Principal chartered Accountant, discusses and responds to the pressing questions...
First of all, I will explain my experience and credentials.
I have worked on clients self managed superannuation funds for over twenty years. Our firm currently audits over 100 fund and provides accounting, taxation and planning strategies for 210 funds.
My role as an Accountant is quite different to that of Financial planner. The main difference being that I do not provide specific investment advice.
From 1 July 2016, I will be an authorised representative of the SMSF Advisers Network, this will continue my ability to recommend to clients to setup Self Managed Super Funds, commence pensions and to setup borrowing arrangements in super.
What are the Risks of Super
1. Constant change. When you are discussing your retirement, you only have one chance to get it right. So it is important, especially as you get closer to retirement age, that you have certainty of the rules. This way you can plan for your retirement needs and live off your savings, that you have accumulated. One of the biggest complaints of the Budget changes, is that the rules have been back dated to 2007, so that strategies put in place will become ineffective.
2. Another risk, is that the age that you can access super will keep being pushed back. Originally you were able to access super from 55 years of age, now it is moving to 60 years of age. The risk is that with a shortfall of skilled and tax paying workers, the retirement age will be pushed back even further to 65 or even 70 years of age.
3. Another concern is that the government will put a wall around super and increase the tax it is drawing on it. This is what happened in Fiji a few years ago and if the government keeps wasting money on public servants and politician perks, then they will need an easy source of revenue, which is taxing super.
So what are the benefits of Super?
1. It is still a low tax environment. In accumulation stage, the tax rate is 15% and in pension phase, it is tax free for investments up to $1.6m and after that still only taxed at 15%, compared to company tax rate of 30% and individual top marginal rate of 47%.
2. In Super , the capital gains tax rate is 10% in accumulation and 0% in pension stage. It is a perfect vehicle for holding assets with large capital growth.
3. Super is safe in bankruptcy. Assuming contributions have been in the normal course of business and not put in super just before bankruptcy, and then if you are placed in bankruptcy, the assets are protected and held on your behalf until you are out of bankruptcy.
4. Super should be part of a long term wealth creation strategy. Due to the benefits of compounding interest, if you can contribute small amounts during the whole of your working life, small contributions when you start working, will build to a large investment by the time you retire some 40 years later.
5. Leaving a legacy. Due to the low tax and asset protection benefits, it is the ideal entity to keep assets for your children and grandchildren.
So in summary, “Is super still the best retirement planning strategy?”
Yes, due mainly to the lower tax rates and asset protection benefits. Superannuation is still an important part of your overall wealth creation strategy. It is an important part, combined with having adequate insurance, a good safe job or business and other investments outside super, such as shares and investment properties.