Voluntary super contributions are poised to become like New Year’s resolutions and lapsed gym memberships – well-meaning, but ultimately unrealised.
Uncertainty combined with a distant time frame begets inertia. As we close out the 2015-16 tax year and welcome in the new financial year with a double dissolution federal election, uncertainty is in generous supply when it comes to superannuation.
The juxtaposition of the federal election timing and the end of the financial year means that some decisions – particularly on the tax planning front – cannot wait until the uncertainty clears.
When it comes to the caps on super contributions it increasingly is a case of use it or lose it. The regulatory theme over recent years – which crosses the political divide – is towards tightening the caps on contributions, so while the election result may affect how that is implemented, it seems unlikely to reverse the policy direction.
But some fundamental things are not changing. These include:
- The need to save over a working lifetime in order to be able to afford the lifestyle you desire in your retirement years.
- Thanks to medical technology and improved standards of living, our retirement savings will, on average, have to last longer.
- The long-term value of having a disciplined savings plan – either within or outside super.
Accountants and financial advisers are no doubt scrambling to make sense of the changes announced in the Budget and explain what it means to individual clients.
Tax location questions – whether money should be held inside or outside super – are likely to be a particular focus in the weeks and months ahead.
The recent changes announced in the Federal Budget may well have damaged some fund members’ faith in the system – notwithstanding the continuing tax concessions.
They may decide to only contribute the mandated 9.5 per cent super guarantee level and look to invest savings above that outside the super system to minimise against the regulatory risk that comes from unexpected rule changes.
For others with the means to achieve it, the strategy will be to maximise the contributions into super and then invest other funds outside super.
Despite the uncertainty, what does remain clear is that voluntary contributions into super are a powerful way of boosting your superannuation account balance above what the super guarantee will get you to.
Vanguard commissioned independent actuarial consulting firm Rice Warner to model the impact of making additional contributions by taking the case study of a 40 year-old male starting 20 years ago, in 1996, to contribute an extra five per cent to super.
The modest five per cent extra in contributions is well below the proposed limits on future contributions.
Assuming our 40-year-old male earns average weekly earnings through the remainder of their working life and retires at 65 in 2021 then their super savings would be $217,193 in today’s dollars.
But with the contribution of the additional five per cent as a concessional contribution our case study’s account balance grows to $339,752 at the time of retirement – more than 40 per cent higher. It seems reasonable to assume that could have a material impact on their retirement lifestyle.
Importantly, the extra funds last a full seven years longer assuming the drawdown rate is in line with the ASFA comfortable retirement standard.
Clearly the concessional tax rate of super helps in this example but the impact is also heavily driven by the simple arithmetic of long-term compound growth. In this case study Rice Warner assumed investment portfolio gross returns of 7.5 per cent each year, less taxes and investment costs.
There may be considerable uncertainty around the super rules as the 2015-16 financial year draws to the close, but there is a high level of certainty that as each financial year ticks over, it takes you closer to retirement and another year’s contribution limit may be closed off.
When it comes to saving enough to fund all or part of your retirement lifestyle, the discipline of long-term saving is the fundamental thing to focus on.
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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