Retired? Should your investments be held within Superannuation?
Monday 01 February 2016
Published by Rick Horvat
Superannuation is seen, and referred to as the investment retirement platform for the majority of Australians. Retirement savings and retirement income in actual fact do not have to be based within superannuation, and in many instances, superannuation may be overly cumbersome, expensive and inappropriate to justify having this structure for the majority of Australian retirees.
According to the Australian Bureau of Statistics (ABS), median balance of superannuation for ‘all households’ was $159,900 in 2013-14.
A large majority of senior Australians rely on the age pension as either their sole, or a substantial source of income in retirement. As a result of recent changes to the social security asset and income test assessment of retirement savings, the benefit of holding these investments in superannuation accounts has largely been removed.
There are some grandfathering provisions in place on certain pensions and annuities that were commenced in previous years; however these are nominal and clearly identifiable by the investors and their advisers.
If you are over 65, retired and have less than $400,000 in retirement savings as a single person or $700,000 as a couple, then you probably shouldn’t be in the superannuation environment.
Based on the same statistics as mentioned above from the ABS, the average balance for a couple aged 55-64 was $488,000 being the highest level of wealth within this structure across all age groups.
There may be no value in holding your money in the superannuation system. From an income tax perspective, a retired couple can have a combined assessable income of $59,000 per annum and not have to pay any tax. If there has been any tax paid by way of imputation on their investments, it will be fully refunded, as long as the assessable income is below that amount.
From a Centrelink perspective; sheltering investments from the income and assets test in a partners superannuation account, whilst below the age of 65 is a valid and justifiable reason. But beyond this strategy, it’s very difficult to to illustrate value in holding assets in superannuation, net of costs and complexity.
Unless you can identify a clear benefit (tax saving, Centrelink benefit) there are many good reasons for not being in superannuation, the following are a few;
- Fees, charges, costs
The average cost for superannuation funds are 1.33%pa on account balances. On top of this you may have to pay advisory fees and, if it is a self-managed fund, accounting and auditing fees.
If your money is invested in cash or a fixed interest investment option, you are likely to be paying upwards of 50% of your earnings on fees.
Superannuation is a very complex tax structure which regulates your access to your own money based on the ‘tax advantages’ associated with this structure. It also requires attention to beneficiary distributions and tax implications on death. Forms, compliance, trustees, regulators, tax act.
- Control and ownership
There are numerous parties interposed between you and your money, i.e. financial advisers, investment platforms, product managers, all creating further complexity and cost.
- Choice of investment
You have a much greater and unregulated choice of investment outside the superannuation environment than you do within this structure.
At a point in time that a member of a superannuation fund passes away their benefit, unless being paid out to a dependent, will have tax consequences payable before being received by the estate.
- Pension minimum payments
Once you commence an account based pension, you must withdraw a regulated amount annually. This means that whether you need this money or not, a minimum amount needs to be paid out of the superannuation environment to ensure strict pension payment obligations are met.
So the questions needs to be asked, Should you remain in the superannuation environment during Retirement?
Superannuation remains the most advantageous retirement tax structure (during your working life) for the majority of Australians. Based on the above, it is not at all appropriate as a savings vehicle for a significant percentage of retirees (once you’ve finished work).
This structure is most beneficial for long-term investment holdings as it continues to provide significant tax advantages on income and capital gains. This is of benefit to a much smaller and likely self-funded retirement population, with larger investment balances.
Incidentally, don’t expect your superannuation provider, be that a bank, retail or industry fund to be telling you to get out of superannuation any time soon. In the 2014-15 financial year, it’s estimated that the superannuation industry generated $30 billion dollars in fees making this area of the financial sector one of the most profitable for product providers. It is therefore not in their best interests to tell you what’s in your best interest!
Next time you see your adviser, ask him/her to clearly explain and outline the benefits and costs associated with being in a superannuation fund and why you should stay in one?