One of the most contentious issues for a young shuffler is superannuation.

Some consider it just another part of your overall investment portfolio. A great tool developed by Aussie Firebug calculates a super/other investment split for attaining financial independence.

I am much more of a pessimist. I do not trust, nor do I want any of my money to be locked away within superannuation.

But for complete fairness, I will firstly present the case in favour of superannuation. I believe people should be given the information to make their own choices and not just listen to nut bags on the internet, that includes me.

Pro Superannuation

Superannuation is the most tax effective way to build wealth in Australia. You are able to contribute money before tax up to a maximum of AUD$25,000 per year.

This $25,000 includes your employer contributions and any additional contributions that you make before tax, i.e. contributions you salary sacrifice. These contributions are taxed at 15% as they enter your fund. However if you earn $37,000 per year or less, you receive a reimbursement into your super fund of this 15%, up to $500 per year.

This effectively means you pay zero tax on your super contributions if you are a low income earner. If you are a middle to high income earner you receive a huge tax break. The net result is that putting your money into super gives you more to invest right now.

For example, if I contribute $25,000 to my super account this year, it will be taxed at 15%, meaning I have added $21,250 to be invested.

If I do not contribute that money to my super, it will be taxed at my marginal tax rate and I will need to pay the Medicare levy. That is 39% out my income! This will leave me just $15,250 to invest instead.

Additionally, income generated within the fund attracts a maximum tax of only 15%. Capital gains held longer than 12 months within the fund attract a tax of only 10%! These are again taxed lower than they would be outside of superannuation. Your other investments will have income taxed at your marginal rate and capital gains taxed at (effectively) 50% of your marginal rate (for assets held longer than 12 months).

To illustrate just how powerful these tax savings are, see the comparison below of 30 years of investment inside vs outside of superannuation at the maximum $25,000 per year.

Salary Sacrifice into Super Invest outside of Super Excess income to invest per year $25,000 $25,000 Effective tax rate 15% 39% Remaining funds to invest per year $21,250 $15,250 Total after 30 years of investing and compounding at 6% $1,778,828 $1,065,519

Assume effective 0% tax on superannuation income after franking credits and effective 24% tax on out of super investment income after franking credits. This assumes a marginal tax rate and Medicare levy obligation that combine to make a 39% obligation. Assuming the same investment growth inside of superannuation as outside of superannuation of 6%.

In addition to these extremely generous tax discounts, once you reach your preservation age, you can withdraw your super tax free. This is after years or even decades of compounding.

Suffice to say, contributing into super will leave you substantially wealthier by the time you are able to access your super than if you invested outside of super.

Against Superannuation

Given all that, I personally hate superannuation.

I’ll get a minor point out of the way first. The preservation age is currently at 60 years old, meaning you can not access your superannuation until you are 60! This is obviously less than ideal for someone who wants to retire in their 30s. Hence why Aussie Firebug made his great Australian financial independence calculator.

But there is a much bigger problem.

As soon as you contribute to superannuation you no longer own that money. That money has essentially gone into a trust, and the trust now owns that money. Before you reach 60 years of age, you are only the beneficiary of the trust, so it pays out that money to you under certain conditions decided by the government. However, the momentary and passing whims of the government can cause those rules to change at any time. There is no stopping the government from:

Reducing the amount that can be held in the account;

How and when the amount can be paid to you;

Who the beneficiaries are; and

Who gets the money when the beneficiaries die.

Some may call me paranoid, but see all the changes coming in July this year!

Also, given the looming crisis of an ageing population that have not adequately saved for retirement, the government needs to find more money or more ways to keep people working for longer.

If I were to make a bet, it is my belief that by the time I am eligible to access my superannuation money, at the very least the rules will have changed such that:

I am no longer able to receive my super in a lump sum payment;

Superannuation benefits will only be tax free up to a certain threshold;

The government uses the money to assist paying other people’s retirement benefits upon the death of me and my spouse.

Considering the government’s track record for changing superannuation rules, I actually believe it naive to think that it won’t be changed again. Particularly during the roughly 30 years before I reach what is currently the preservation age.

To help me demonstrate, look no further than the government’s own objective for superannuation, which is as follows:

“…the objective of the superannuation system is to provide income in retirement to substitute or supplement the Age Pension”

This objective, introduced in 2016 is phrased masterfully by a gifted writer. I believe it is the first step in taking away your superannuation. Let’s break it down:

The objective is for “the superannuation system” to “provide income in retirement”. Note that the objective is not for your superannuation to provide you with income during retirement. Note that it would be in contrast to the objective if superannuation were to provide you with a lump sum payment. The objective is only to provide income and taking lump sums would reduce the ability of the superannuation system to pay an income. Note that it would be in contrast to the objective if your superannuation were to be inherited or otherwise passed on when you die. As this would reduce the superannuation systems ability to pay an income.

I could go on, but I would like to reiterate that this is wild speculation. There is currently no indication that the government plans to do any of this. Additionally I’m only 29, so those who are older face less risk of superannuation changes before their retirement. Those at different life stages will have to make different choices. I always recommend you do your own research and come to your own conclusions.

So there you have it, a shuffler’s perspective on super. Great tax benefits, but huge unknowns of what the future holds.

Where do you think is the best place to park your money?

Shuffling my money into anywhere but super.

Pat The Shuffler

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