It’s no secret that I like super. It provides massive tax benefits and, in my opinion, if you’re not utilising those tax benefits then you are likely not maximising your financial position.
But sure, super does have some downsides namely age restrictions around access and contribution limits, but there are some arguments out there against super which need to be challenged and today I am going to do just that.
#1 Super is a bad investment
Let’s start with the big one – superannuation is a bad investment. Wrong. Superannuation is not an investment it is a STRUCTURE. It is a separate legal entity which is managed by a trustee whose primary responsibility is to provide a benefit to members in retirement.
Put more simply, superannuation is a bucket. In that bucket, goes the investments. The investments you get to choose to put into the bucket are determined by the trustee and generally speaking the flexibility you have is going to be determined by whether you are in an industry super fund vs a retail super fund vs a self-managed super fund (SMSF).
Now I am not going to go into the pros and cons of the different types of super funds, because that’s a whole new can of worms, but I will say that generally speaking the range of investments in an industry fund are the lowest, SMSFs are the highest and retail funds sit somewhere in the middle.
Provided you have the appropriate structure you can invest in just about any asset class within superannuation. You can buy an investment property, shares, term deposits, gold, you could even buy art work should you be so inclined. There is no restriction on what you can invest in with super provided you have the appropriate structure. There are only restrictions as to what you can do with the asset but again that’s a topic for another discussion.
So don’t tell me super is a bad investment – rather it is a great structure – in fact it’s a low tax structure where you can more or less invest in anything you like.
#2 I will be dead before I can access my super
I hear this one a lot from younger people. People who are in their 20s, 30s and sometimes 40s. Well let’s look at the feasibility of this argument.
If you were born after 1 July 1964 then you can’t access your super until age 60. As an Australian, your average life expectancy is currently 83.5 years and I would take a bet that as time goes on that age will increase due to advancements in medical technology.
So to say that you are going to be dead before you can access your super is betting against the odds. The odds are in favor that no, you won’t be dead, you will be living well over 20 years past the date at which you can access your super.
Now I can hear you saying “when we get to 60 the preservation age would have increased as the government always change the rules” which brings me onto my next point.
#3 The government are always changing the rules around super
Yes, you’re right. I will concede that the government often do tinker with the rules around superannuation more than they should. Just last election we were at risk of losing excess franking credits in super. But is this a good enough reason not to utilise super as a savings vehicle?
To answer this, we need to consider why super was bought about in the first place. Superannuation was bought about to reduce the reliance on the Age Pension. The government basically want people to support themselves financially in retirement, without government assistance.
By understanding this, we know that it is in the best interest of the government to continue operating superannuation as a beneficial retirement savings platform. While I do agree that the government will continue to play with the rules, any changes they make will still keep super as the most effective retirement savings platform.
The age to access your super will never be higher than the Age Pension age because this just defeats the purpose of why government created super. The tax rate inside super will never be higher than marginal tax rates as people would stop using the system and savings for retirement will drop.
So yes, the government will likely continue to tinker with the rules but I believe that any change they make will not deem super an unattractive system.
#4 I am better off investing in my own name.
The whole reason we use superannuation is because of its tax benefits. When you contribute to super as a concessional contribution you can claim those contributions as a tax deduction. You have to work within the concessional contributions cap limit to do this which is currently $25,000 per financial year.
Once inside superannuation, earnings on investments get taxed at a maximum rate of 15% in accumulation phase and this drops to 0% once you enter retirement phase.
Let’s compare this to investing outside of super. You invest the same amount of money every single year but you can’t claim a tax deduction for the amount invested. Once invested any earnings will be taxed at your marginal tax rate which can be as high as 47% including Medicare levy.
Now I want to highlight one particular aspect of super which is mind bogglingly good. When you invest through superannuation, and you hold the assets for the long-term, you can mitigate any capital gains tax on that investment by transferring the asset to pension phase and selling it down in pension phase. That is years upon years of unrealised capital gains which incur no tax. Now not all super funds let you do this, again you have to have the right structure, but that is a MASSIVE benefit.
There is no comparison, for the average person super is a much more tax effective way to invest!
#5 Super gets destroyed by fees.
Yes, just about every superannuation fund incurs fees. The only time I have seen a no fee superannuation fund is if you leave your money 100% in cash because the “fee” is essentially factored into the interest rate they pay you on cash. But fees are small price to pay for the benefits you get of investing through super.
The amount of fees you pay is going to come down to which super fund you use. Generally, the more basic the super fund, the lower the fees. That is why industry super funds are a great option for those fee conscious people.
The more features, reporting and investment flexibility you have, generally the more you pay in fees which is why retail super funds and SMSFs typically have a higher fee structure.
As time goes on the fees within super are reducing. It is a very competitive industry and to remain competitive, super providers need to compete on price. As a consumer you should always compare your super fund with what else is out there on the market to ensure you are getting bang for your buck.
Just like you can’t convince me that Carol Baskin didn’t do it, you can’t convince me that super is a bad place to hold your money. Sure, there are rules around super which can be restrictive but if you utilise super for what it is, a long-term investment structure, I believe that you will benefit as a result.
I don’t know of any 60 year old’s who said “I wish I had put less in super” but I know plenty who wish they put more in!