Why It's Necessary To Have Superannuation
Sun Herald
Sunday December 4, 1988
SUPERANNUATION may not be as tangible as a roof over your head, but it can add up to the same measure of security.
Like property, it is a tax effective investment. For many, therefore, it is a necessity, rather than a luxury.
And necessity is often the mother of the hard-pitch salesman.
A superannuation agent will usually call a new employee and offer to pay a house call to explain the super scheme. Some agents have a more sophisticated style than others-they may even suggest showing a video.
Suddenly, you are faced with the prospect of sacrificing part of your pay packet to a savings program that will not provide any direct benefits until you are at least 55 years old.
It is a tall order for a young employee, and the benefits of such a scheme may be hard to grasp.
Government incentives in recent years have changed the general perception of the value of superannuation. In fact, total superannuation investment is valued at around $100 billion, compared with $80 billion six months ago.
Earlier this year, the Federal Treasurer, Mr Keating, made amendments to superannuation policy and stated that these changes were final.
However, a recent discussion paper released by the Department of Social Security on the benefits of pension type super payments at retiring age, as opposed to lump sum payments, has led to speculation that the rules will be changed again in the future.
Changes made in recent years by the Labor Government mean that superannuation is no longer the domain of the white collar worker, but is now perceived as a savings plan from which the low income earner can benefit.
Trade unions also provide support for the continuation of superannuation in all sectors of the workforce.
It is widely recognised that there are serious economic problems associated with an increasing, aged population. Governments will need to provide an incentive for self-regulated savings plans, as an alternative to pension payments.
At present, superannuation is a tax effective investment, earning interest which is often better than savings investments with banks, but allows the policyholder to claim a tax deduction against other income.
The average annual compound return over the past three years for market-linked superannuation funds has been 22 per cent, compared with savings bank investments at around 13pc.
Flexibility will become a feature of superannuation plans, enabling a broader cross section of the workforce to participate. Lower income earners will need to be given the option of temporary suspension of payments in times of economic hardship.
Benefits from an employer-sponsored superannuation scheme are also related to tax effectiveness. The employer can claim a deduction for contributions to the employee's scheme.
The wages accord under the Labor Government provided a tax incentive for employers to offer more super contributions in compensation for wage increases.
The employer will often contribute more to the scheme in lieu of other taxable fringe benefits and salary increases.
There can be benefits in contributing to both an employer scheme and a personal scheme, if the employer is not offering the maximum lump sum benefit available under government legislation.
It is still only possible to receive a maximum tax deduction of $3,000 per year, so any contributions over this amount are automatically taxed.
At retiring age, the accumulated lump sum will be tax free as long as the money is rolled over into an investment vehicle, such as an annuity.
Once income is returned to the investor, tax will be payable. Over time, this tax free period represents a saving on your investment, compared with regular income from other sources which are taxed in the year of receipt.
Perhaps the most frightening aspect of a super plan is that the commitment is long term. A portion of that hard-earned wage cannot be returned to the investor until retiring age.
And the fact is, a lot of people sign on the dotted line without considering this fact.
When discussing superannuation with anyone, do not automatically assume it is beyond comprehension. The fact is that some people cannot explain superannuation in an easily understood way. Not all agents know what they are talking about. Find someone who does.
Once the policy has been signed, there will usually be a 10 day free look period. The contract can terminated in that period, if the client so wishes.
This facility can be quite comforting for those who feel they may have been pushed into the decision.
The agent usually likes to know a few details about the client before making a house call.
Knowing a client's age and annual wage means the agent can prepare a personal case study, based on the returns of the fund, which will give the prospective client some idea of the benefits of the scheme.
The truth is that this sort of projection is not necessarily realistic. The chart, which calculates the retirement contribution, the benefit and the investment accumulation, as against total net payments, (that is, after tax deductions and fees payable under the super plan), cannot accurately predict either the return on the fund's investments or the salary growth of the contributor.
As Ken Boag, general manager, superannuation, at Westpac says:
"The real picture is not simple. What the agent would like to do is show you the final benefit, based on what you are earning the day before the scheme matures.
"If the chart showed a salary growth of 8pc a year, based on annual inflation, the figures for the final benefit would look like telephone numbers| Nobody would believe it."
The effects of inflation cannot be accurately presented to the prospective client, either.
"Who knows, a Big Mac hamburger may be worth a million dollars in 30 years'time", said Mr Boag.
Returns from the super investment will depend on the type of investment chosen. There will be a choice of different risk profiles. More volatile investments are usually preferred by those who have just begun the scheme. The switch to a more stable investment return can be made-at a cost-in the last years of the plan.
It is good advice to consider the returns of a fund over three years. The fund will normally have ups and downs according to market conditions, but should be able to average out its returns to the benefit of the investor.
The reason superannuation is so complicated is because it has into take account many economic factors, as it is intrinsically linked to the Australian economy as a whole.
What you get out of a super plan depends on the wage you earn over time, the rate of inflation, the investment climate over that period and the tax conditions applying to your scheme.
Nobody can answer these questions. But some will try to predict them.
When the superannuation agent comes to call, there are a few questions the prospective client needs to ask.
Overall, the product should be as flexible as possible. Most of the personal super schemes are either geared for particular industries, such as itinerant farm workers, or they are designed to suit people's changing financial needs.
In the case of the National Mutual personal superannuation plan, the first two years of contributions are not refundable if the policy holder terminates the scheme within that period.
Westpac Financial Services has no such penalty. The few contributions you might make are still held as investments in the fund until you reach 55, and the policy holder will receive all contributions and interest then.
One way of comparing super plans is to talk to an investment advisor, such as RetireInvest, Pembroke Financial Planners or the Womens' Investment Network.
Debra Dooling, NSW Acting Manager for the Womens' Investment Network, says the latter's clients are not charged for the advice given. The company receives part of the commission the client pays as an annual charge to the superannuation manager.
"There are specific products which are ideally suited to women and which we recommend once we know the clients' circumstances."
WHAT YOU SHOULD ASK ...
* How much tax will I pay, and when?
* What has been the return of the fund over the past three years? How does this compare with other super funds?
* What happens to my money if I think your fund is not performing well and I decide to change schemes?
* What if I go overseas to work and want to suspend payments?
* What if I want to increase or decrease my contributions?
* If I change jobs and want to join the firm's super scheme, what happens to my personal super plan?
© 1988 Sun Herald