Until 12 months ago superannuation, like the rest of the sharemarket, was basking in a golden age of year on year double digit returns. It seemed the party was never going to end. The Government’s “simpler super” changes which came to effect from 1 July 2007 seemed to only strengthen super’s allure.

Then came the credit crunch which has fast turned into a global financial meltdown and superannuation returns, like the rest of the sharemarket, have suffered as a result. But is superannuation now a bad place to invest your money?

Investments held in superannuation are no different to those held in an individual’s name. The reality is if your super fund is invested in growth type assets such as Australian shares it is unlikely to have escaped the downturn. We must remember that super is a long term investment and given time, the sharemarket will recover. History has proven this time and time again. The attraction to superannuation is not the investments it holds but the structure itself.

Superannuation continues to offer an extremely tax effective mechanism to invest for all individuals, from young wealth accumulators to people approaching retirement and then of course those who are retired. Let’s have a look at the benefits specific to these groups -

Wealth Accumulators
Contributions made to super from a individual’s gross salary, e.g; employer contributions, are taxed at a maximum of 15% within the fund as opposed to the individual’s marginal tax rate which could be as high as 45%. In order to achieve some valuable tax relief, individuals can choose to contribute up to a maximum $50,000 per annum to superannuation, otherwise known as a salary sacrifice strategy. Based on a 45% tax rate, the saving here could be as much as $15,000 per annum.

Of course the end result is a higher superannuation balance at retirement based on the effects of compounding returns over time. The only drawback for younger people is the loss of access to capital until they reach preservation age.

Approaching Retirement
Super can be used very effectively as individuals approach retirement. Let’s take for example the Transition to Retirement (TTR) strategy for those over 55 years of age. This strategy involves drawing an income stream from your superannuation balance while you continue to work. The strategy allows you to salary sacrifice additional income to superannuation, which achieves ongoing tax savings and leads to a higher future super balance. Whilst the income stream drawn from superannuation may be taxable, it attracts taxation concessions which further adds to the tax savings.

To make this strategy more appealing, once a superannuation fund begins paying an income stream to a member, the investment earnings derived from the member’s balance becomes non taxable.

Retirees
For those looking to retire with accumulated assets within superannuation, the news gets better. You have the ability to draw an income stream from your balance to fund your retirement needs. This has the following benefits –
- Your super balance would cease to pay tax on investment earnings or realised capital gains;
- for those aged between 55 – 60, you would be entitled to receive tax effective, or tax free income; and
- for those aged 60 +, you would be entitled to receive income that is tax free.

Superannuation, like all forms of investment, should be approached with a long term focus as part of an overall financial strategy. Short term fluctuations such as the current financial crisis will come and go, however, this should not affect your long term strategy provided it is appropriate to your meet your long term goals and objectives.