Look beyond super

Alison Kahler

Natasha Panagis from Centric Wealth. Photo Andrew Quilty

Top-notch financial advisers worthy of respect used to tell clients that only 50 per cent of their assets should be invested in superannuation. After all, you can’t cash in super until you retire and the system changes so often that it’s impossible to know how it will work in 20 years – let alone 40 – when you finally quit work.

That wisdom was put to one side when the former Howard government abolished tax on super payouts to the over-60s not quite five years ago, creating an investment playground for cashed-up baby boomers who can enjoy private pensions that attract not a single cent of income tax. Pretty quickly, the advice became that 80 per cent of capital, if not more, should be slugged into super.

But the global financial crisis has taken the shine off super somewhat. Big losses due to most funds’ substantial investments in world sharemarkets have shown that holding all your eggs in one basket – even a tax-effective basket such as superannuation – isn’t necessarily wise.

And, inevitably, a looming change to tax rules may mean many people might in fact be wise to limit their super investments after retirement and instead focus on a portfolio of other assets, which could be as simple as term deposits for those with a relatively small sum.

People with more – even in excess of $1 million – could structure a portfolio that is just as tax free as super in retirement by taking advantage of special tax concessions and ordinary franked dividends.

Such a portfolio has more than one benefit. It would be more flexible than super prior to retirement as people would be able to dip into it as they pleased, in the case of job loss or an emergency, for example. It can also make it possible to invest in a broader range of assets than is sometimes possible with super.

“As a rule of thumb – a very broad-based one – I tell clients to hold at least one-third of their assets outside super,” says Mike Ingham, a Godfrey Pembroke financial adviser in Camberwell, Melbourne.

Oddly, the looming tax change that could alter savings plans is unrelated to super. It’s instead part of the federal carbon tax package. From July 1, the tax-free threshold will rise from $6000 to more than $18,200 as part of efforts to compensate the community for a forecast increase in the cost of living from the package.

That means that people can earn more than $18,200 before paying any tax – a figure that means retirees could invest $364,000 in a term deposit at 5 per cent interest and get the same tax-free income offered by a super fund, but without the fees charged by a super fund, as long as they had little other income.

“If it was someone earning $1 million, I would say maximise your super because there are tax benefits overall,” says adviser George Cochrane from Cochrane Investment Services in Sydney. “But if it’s someone earning $50,000 without many other assets, I’d say pay off your mortgage at retirement and put the balance in term deposits.”

Others argue that even a millionaire can do better by having a portfolio outside super, even if they choose to also use superannuation to hold part of their assets.

The crux of the argument is that the super tax benefit is not the only tax benefit available to retirees and that widely used concessions such as the senior Australians tax offset as well as imputation credits can deliver a tax-free income to a couple over 65 with in excess of $1.2 million, or to a single person with $670,000 invested outside super.

This is sufficient capital to provide income for a couple of $66,872 in the first year of retirement or $36,515 for a single person, according to Natasha Panagis, technical research manager at financial advisory company Centric Wealth.

And, in fact, it’s the tax-free status of a super payout to the over-60s that helps make generating this income outside super possible.

“As super lump sums and pension income is excluded from your tax return after age 60, significant assets can be invested outside super and a similar tax-free income can be received,” says Panagis.

“In addition to a retiree’s super, most have [income] from a number of other sources, such as a government pension, rental income and dividends,” she says.

Helen Dundon, an adviser with Prescott Securities in Adelaide, recommends that her clients pump no more into super than the amount for which they can claim an annual tax deduction, unless they are close to retirement and paying a high tax rate – that is, $25,000 for the under-50s and $50,000 for the over-50s (although this could change on July 1).

But there is far more than tax to consider when weighing up the amount that should be invested in super.

The super system is constantly under review and big changes might stymie retirement plans laid down years in advance – imagine the horror one might feel, for example, if a government raised the age at which super could be withdrawn by a number of years.

This is a proposition often suggested by economists and it is entirely within the realms of possibility that it will one day happen. Super that can now be taken at the age of 55 to 60 might not be available until well into the 60s – Dundon suggests as late as 67 – for people with no other assets and with no means to retire earlier.

Such big changes to super laws are often phased in so as not to penalise people who invested previously, says Ingham, but he acknowledges this is not always the case and says a savings strategy allowed one day might not be allowed the next.

And, anyway, super is not supposed to be a tax shelter for all of your capital – those who use it that way risk significant penalties. Investors with do-it-yourself superannuation funds, in particular, need to be conscious of the so-called sole purpose test – a rule that requires all superannuation be invested solely for the purpose of generating retirement capital.

That may mean a property, for instance, could be better off held outside super if it is likely to be a residence that people might like for their children for a period, perhaps for when they attend university or begin work in another town, according to Ingham. It also means that the oft-suggested strategy of saving extra in super to fund a grandchild’s education with tax-free savings is pushing the boundaries of the rules a tad too far.

“Super is still extremely important. One reason is [that] its enforced nature means people will have funding for retirement put aside. And for [the wealthy], the ability to pay no tax is very attractive,” Dundon says.

But it’s certainly not the Holy Grail of investing.

The Australian Financial Review