Navigating retirement funding: Is superannuation such a great idea?

Superannuation and retirement have always gone hand in hand. Yet recent budget announcements around taxation, contribution caps and other proposed changes have caused a stir and understandably, some Australians may be reconsidering the merits of superannuation.

Presently, retiree couples with a low income or seniors tax offset can each earn around $74,000–$83,580 p.a. before they start paying any taxation on income outside of their superannuation environment.

Let’s say, for example, that a couple’s capital was all invested in a term deposit. Based on today’s interest rates, they could each have around $2.7 million in a term deposit before paying any taxation.

Alternatively, if they invested their money in a share portfolio, each portfolio would have to be worth around $1.67 million before they had to pay any taxation. 

So the question is, with all the confounding complexities around super; is it really worth the headache? 

The other question is, will the proposed changes have much of an impact on the general retirement population? The budget announced a $1.67 million cap per person on a superannuation fund (combined $3,340,000 per couple) before any taxation comes into play. Anything above this may be subject to a 15% accumulation taxation on earnings.

For most Australians, this excess will likely move from their superannuation into their personal names once the measures are potentially introduced.

As you can see by these limits, for most retirees around Australia, taxation will only start to be a factor if they hold more than $4.94 million in combined assets, excluding their own home (both inside and outside of super).

On the other hand, if you only have a couple of hundred thousand in superannuation at retirement, does it make sense to have a superannuation fund with all the hassle of fees, regulation changes and complexities, etc., or are you better off just having the money invested in your own name?

Part of this answer will depend on the capital gains element of your portfolio, i.e., how much is generated on an ongoing or a forecasted basis in the future. The biggest benefit for superannuation is that if it is in pension phase, under the proposed limits from a capital gains standpoint it will be 100% tax-free.

Moving forward, I suspect that most people will look to manage their legislation risk—the risk of the government changing their mind—by holding some assets inside of superannuation, and some outside of superannuation.

This will also assist with distributing the tax base across both structures, and keeping a foot in both camps should there be any changes.

However, like most strategic financial planning, you have to consider all the above factors in context to your personal situation. You will also need to consider the benefits of salary sacrifice contribution into superannuation, or deductible contributions, as well as a whole range of other factors in determining which path is best.

Please also remember that before embarking on any investment or strategic financial planning decisions, you should always seek professional guidance from a licensed financial planner. Of course, I recommend AJ Financial Planning.