It’s a good time to remind ourselves that superannuation is not an investment – super is a tax and legal structure to create an income in your retirement.

Superannuation is a government regulated way to boost long term savings with generous tax concessions, as the mainstay of your retirement nest egg alongside your home. Your employer has to contribute 9.5 per cent of your wages into a complying super fund, and these contributions are taxed at 15 per cent, not the usually much higher marginal tax rate of your wages.

Once this money is in your account the earnings from the investment is taxed an average of 8 per cent. When you retire and draw down your lump sum, you pay zero tax on any earnings your investments then produce – another great benefit.

The price for all this is that once your money is in super, it is there until you retire.
The performance of your super really depends on the types of things (asset classes) you are invested in.

Growth assets like shares and property are more likely to produce shorter term fluctuations in their price.  History has shown that shares have performed in this group over the past 100 years. But to get these returns you must invest for at least 10 years to weather the volatility they can create. This requires discipline, calmness and the ability to stay focused on the long term result above the noise of today.

At the other end of the spectrum, putting your money in cash is a more stable. But when interest rates are low – as they are now – you risk losing your earnings to inflation. Generally you need to aim to produce an overall return from your super after tax and fees that is two per cent to four per cent a year better than inflation to enjoy a decent retirement. Adding in more than the regulated 9.5 per cent of wages is also required.

In between cash and equities, there are fixed interest investments such as government, corporate debt and property. They are more volatile than cash but don’t have the same returns as shares.

Where should your super be invested? Match your planned retirement length to the asset classes that will produce enough income for that time. For a 65 year old today this is at least 20 years.  In the past, people would switch to cash or fixed interest from any growth investments they held which is seemingly prudent but it is very dangerous as it maximises the impact of your number one risk. That risk is that you run out of money too early or have to live on much less than you would like.

A better way is to simply place one to two years of income into cash and bonds in a separate account. This means you have immediate living expenses covered for a few years, while your nest egg is growing and the price moves around in the short term.

The main point to remember as the super statements arrive: Super is not the investment, but you can actively manage your investment options within super to ensure you gain the best returns commensurate with your timelines.

If you would like  to contact Campbell Korff of  Yellow Brick Road Ballina go to: www.ybr.com.au/Branches/Ballina

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If you are in or nearing your 50s and unsure of whether you have enough savings to retire on or simply want to accelerate your retirement savings, making use of a Transition to Retirement Pension (TTRP) can be a very effective strategy writes Campbell Korff from Yellow Brick Road Management.

Since 2005, the superannuation rules have allowed people nearing retirement to supplement their income by drawing up to 10% (and a minimum of 4%) as a TTRP. The rationale is to encourage people to work longer by allowing them to reduce their hours and top-up their income from superannuation.

However, for those willing to continue to work full-time through their 50s and 60s, these rules present an opportunity to take advantage of the highly favourable tax concessions applicable to superannuation contributions, earnings and income.

The basic strategy is to salary sacrifice as much as you can into superannuation (up to $35,000 if you are over 50) and draw back out of superannuation only what you need to live on as a TTRP. This strategy can also be used by self- employed persons in a similar manner.

The main benefits of implementing a TTR strategy are:

• Pre-tax income contributed to superannuation (within the Concessional Contributions Cap) is taxed at 15%, instead of your marginal income tax rate if you do not save into superannuation. In many cases, more than halving the income tax rate on the amount contributed;
• Earnings tax paid inside of superannuation can be eliminated by using a TTRP. This effectively adds 15% to the performance of your retirement savings each year;

• Tax friendly income derived from the TTRP will allow you to salary sacrifice more into superannuation than you need to take out. Income derived from a TTRP is generally more tax effective than income received from working, especially after age 60. This can open up an ‘arbitrage situation’ where the amount needed to draw from the pension is much less than the amount needed to replace it via salary sacrifice;

• The TTR strategy can result in lower taxable and assessable income. This can enhance the ability to qualify for tax offsets such as Mature Age Tax Offset (MATO) and Low Income Tax Offset (LITO);

• The strategy can be completely unwound (i.e. funds rolled back to superannuation);
• The level of income received can be adjusted between minimum and maximum levels; and
• This is a tax driven strategy. This means it is not reliant on strong market performances to make it a successful strategy.

If you would like more information on preparing for or implementing a TTR strategy, contact your wealth manager.

If you would like more information on these issues, drop me an email at [email protected]. Or visit the YBR Ballina website on: ybr.com.au/Branches/Ballina

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