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Continued from Super ain’t so super – Part 1

ABISMAL PERFORMANCE

One of the main reasons why almost nobody will ever make enough money from super to fund their retirement is the abysmal performance of super funds. SuperRatings is a company which keeps track of the performance of the largest super funds in Australia, and produces a statistical analysis of their returns ranging from one month to ten year performance. The super funds are also divided into eleven categories or indexes, which are: High growth, Growth, Balanced, Conservative balanced, Capital stable, Secure, Australian shares, International shares, Property, Diversified fixed interest and Cash.

We all know that super indexes have been hit hard over the last few years, so we really need to look at the ten year records to get a balanced view on super performance. To those people that may claim the ten year performance is skewed by the global financial crisis driven share market collapse, we should also point out that the ten years have also been skewed in the opposite direction by a spectacular 5½ year boom, meaning that overall it is a fair representation of results.

Australian shares were the leading performing category over the last ten years, averaging 9.67% per annum. Conservative balanced and Growth were the next best of the eleven indexes, both averaging a 6.04% return. At the bottom end of the scale, International shares was the only index to return a negative result, with -3.54%. The Property index was the next worse, and rose by 4.27% on average in the last ten years. Assuming an equal weighting for each index, the overall average of the eleven SuperRatings indexes was a tad below 5% per annum.

When the average inflation rate of 3.15% is included in the calculations, this represents an overall average superannuation fund performance of just 1.85% each year. Abysmal, pathetic and ridiculous are a few words that come to mind. To think that Australians are being forced to invest 9% of their income into an investment that returns just 1.85% each year certainly raises a few eyebrows concerning the current superannuation system.

UNLIMITED PROBLEMS

The problems with the Australian superannuation system aren’t limited to low returns. There are a myriad of other issues which are detrimental to its overall benefit, as well as additional factors which compound the low return issue. One of these is the severe restrictions on available investment classes, which forces people to continue investing in mediocre options.

The Australian system forces investors to primarily invest in the Australian share market. This props up share prices to unrealistic levels and at the same time allows the elite members of society to earn big profits from the share market. Property is the other main alternative, for which the forced investment is a contributing factor behind the present property bubble waiting to burst.

Going hand in hand with the share and property super options are the fund managers lining their pockets from excessive fees. So not only are they poor investments to begin with, but the fund managers will make sure that they take a healthy share of your profits too. Although there are self-managed super funds, these also face restrictions on investment classes, although not as severe. But the outrageous fees will deter all but the wealthy from being able to use them.

The government is also guilty of further greed in regards to superannuation taxation. They are like a two-headed monster, with one head encouraging people it’s for their own good to invest in super for retirement, while the other head scavenges every dollar it can by taxing money being put in, taxing while it’s in there, and then taxing when it is taken out. They also claim it is your money, but won’t let you withdraw it or use it when you want.

All of the issues plaguing Australian superannuation give weight to the scam argument -which is that superannuation is nothing more than a scheme to make fund managers, share traders and politicians rich. Whether it is a scam or not can be argued for years, but one thing is for certain – it is impossible for superannuation to fund the retirements of the Australian public. The maths tells the story that super ain’t so super after all.

MOST DON‘T HAVE ENOUGH

The media have been running their latest scare tactic campaign and warning the public that their current levels of superannuation contributions will not be enough to fund a comfortable retirement. While there is a lot of truth to their claims, they fail to touch the more sensitive topic of whether the Australian superannuation system is a scam.

If you look at the parties quoted in the news reports, it is easy to recognize that the scare campaign has been instigated by members of the superannuation industry. The objective is clearly to get more people to make voluntary contributions into their super funds, and convince the public to get behind their push for compulsory employer contributions to be raised from 9% to 12%. More super under management equates to more fees and more money in their pockets. Businesses serving the super management companies have also got in on the act and given their opinions in interviews with the media.

They have certainly succeeded in painting a dire picture for the future of Australian retirees. Unfortunately, they have failed to detail just how bad the problem will actually be, which gives weight to the argument that the current superannuation system is just not working. It is plagued by problems such as fund mangers charging exorbitant fees, restrictions on investment classes, inability to withdraw when you see fit, and excessive taxation issues.

PICKING APART THEIR STATISTICS

Industry groups are throwing up big numbers to enhance their case for more money to be put into super, such as recent reports detailing that Australia is facing a $450 billion super shortage, or $80,000 per person. But examining the actual figures more closely reveals that these shortfalls are just a drop in the ocean compared to how bad it really is.

A recent news article quoted a survey by ASFA (Association of Super Funds Australia) and Westpac, which stated that a comfortable retirement requires $40,000 per annum for a single person or $50,000 per annum for a couple. This was followed by claims that these levels of income require a lump sum of $400,000 to $500,000 by retirement. There are two major problems with these assumptions. Firstly, they have either assumed the people the die early or put the money in a very high returning investment. Secondly, they have failed to take into account the effect inflation will have on the end value.

Wealth management firm Yellow Brick Road has some equally dubious claims. They show that a 30 year old with no savings and a salary of $80,000 will only have $381,000 by retirement if they rely solely on their employers super contributions, and run out of money by the time they reach 77. They then go on to say that salary sacrificing an additional 3% of their income each year will build up a retirement fund of $540,000 and last beyond the life expectancy age of 82 years.

It is interesting to note that they used a 3% increase in their example, which magically adds up to the 12% figure the superannuation industry is pushing the government to raise employer contributions to. Although the example used salary sacrificing, the main point was to convince both the public and government that 12% is now the minimum requirement and that immediate action should be taken to raise the figure. The example reeks of further 3% manipulation, by containing an unrealistic salary for a 30 year old. The models always seem to be based on a death date as well. Can’t they work out that sometimes people live above the average life expectancy age?

BAD ASSUMPTIONS

Basing superannuation retirement models on the fact that someone will die at a certain age is a grave mistake. A certain proportion of the population will always live longer than the average, so what happens when they run out of money to live on? The other problem is that they are expected to spend all of their life savings in retirement and leave nothing to pass on to their family.

Getting back to the AFSA and Westpac survey, we need to emphasise that the figures quoted were the recommended amounts to achieve a comfortable retirement. But they also released a bottom line figure of $19,686, which they have described as the absolute floor to achieving only a modest standard of living – In other words, living just above the poverty line. Similar to the Yellow Brick Road statistics, they have also made calculations based on a thirty year old person with no savings receiving the basic employer paid superannuation entitlements and working for the next 37 years.

They have estimated that a worker on the median average annual income of $45,000 will end up with $23,482 to spend each year in retirement, and those on the average of $60,000 per annum will be slightly better off with $25,623. AFSA has been pushing the line that the government expects people to survive on $25,000 a year in retirement, and have demonstrated that the Australian public expects to need more to live on from their survey, which showed that more than 60% of respondents believe they will need greater than $40,000 per annum as retirement income.

Once again, all of these models fail to take into account the effect of inflation on the buying power of money. Using the models 37 year timeframes and combining this with the average annual Australian inflation rate over the last 10 years, which has been 3.15%, we can easily demonstrate that the superannuation system is grossly inadequate. A $25,000 annual income in 37 years time will be worth the same as $7,649 today. Even at $40,000 there is still a problem, with that amount only being worth $12,239 a year.

Assuming that today’s rate of $25,000 per year is a fair amount to survive on; when we take inflation into account we will need to receive $61,256 per year in 37 years time to achieve the same dollar buying power. Can anyone spell IMPOSSIBLE? It really makes you wonder why the government is making it increasingly difficult to put earnings into super, by cutting maximum contribution rates and increasing taxes.

Continued at Super ain’t so super – Part 2

WHAT IS SALARY SACRIFICING?

Salary sacrificing is when your employer pays for benefits such as extra superannuation contributions, cars or laptops from your pre-tax salary instead of you personally paying for them from your after tax salary. What was once considered as a service solely for the high flyers is now becoming increasingly popular with the lower end workers.

The main purpose is to save money on taxes. Even a simple example can highlight the tax savings, such as a $50,000 pa salary earner purchasing a $2,000 laptop. Normally the person would pay tax on $50,000 each year and then purchase the laptop with their own money. With salary sacrificing, the purchase is instead made by the employer and deducted from the wages, which now become $48,000. In this case the person still ends up with a $2,000 laptop, but only pays tax on $48,000 rather than $50,000.

You will need to enter into a salary sacrificing arrangement with your employer. It can not be backdated to include work already completed, so it will only be relevant for any future earnings. However, not all companies allow their employees to salary sacrifice, due to the extra administrative hassles. For the companies that do provide salary sacrificing, some will charge an administration fee to cover the extra human resources costs in managing the agreement.

THAT’S SUPER, OR IS IT?

One of the more popular employment benefits for which salary sacrificing is implemented is extra superannuation payments, especially among the high earners. Instead of income being taxed at the appropriate marginal rate, income that is salary sacrificed into superannuation is instead taxed at the low rate of 15%. Interest earned within the super fund is also taxed at 15% rather than a tax rate as high as 46.5%.

Having your income taxed at 15% might appear advantageous, but there is a myriad of laws making that calculation far more complicated. Firstly, your employer is restricted on the amounts they can contribute, mainly based on your age. There is also the fact that your taxable income will reduce, which would normally lead to a reduction in your employers superannuation contributions.

You will need to be careful and make sure that the superannuation is paid into a complying fund, and that it is not for an associate, such as your partner. In both of these instances, these contributions will be treated as fringe benefits and attract the associated taxes. Also watch out for additional taxes and surcharges imposed by the government for high income earners.

Many people forget to consider that salary sacrificed superannuation contributions may also be taxed further upon withdrawal from the super fund. This needs to be weighed up against personal contributions from your normal wages which do not attract these taxes. For anyone earning less than $60,000 pa, it is possible that salary sacrificed superannuation contributions may end up costing you more in tax in the long run.

With the poor performance of super funds in recent years, you need to wonder if it is better to avoid putting money into superannuation and instead using it to invest freely in the investment of your choice. Salary sacrificing into superannuation is not a clear winner and you should spend the time to calculate whether it is the right choice for you.

CLEAR WINNERS

Although superannuation isn’t a clear cut winner, there are many other employment benefits that salary sacrificing is definitely beneficial for. Some of these employment benefits, such as cars, attract FBT (Fringe Benefits Tax). But the tax free items will always lead to tax savings, even after any employer superannuation contribution reductions have been taken into account.

FBT-exempt items include:

• Laptops (one per year, regardless of whether they are for business or personal use) and accessories such as portable printers and software
• Mobile phones (must be used for business)
• Personal organisers such as PDAs
• Briefcases
• Calculators and other portable electronic devices
• Protective clothing items
• Tools of trade
• Fees for professional associations or unions
• Childcare expenses (only if the employer has its own childcare facilities)
• Living away from home expenses
• Children’s education expenses (only if you are living overseas)

FRINGE BENEFIT DOUBTS

There are also a range of employment benefits for which FBT is payable on. Since the FBT is charged at the top marginal tax rate, there is little benefit for people to salary sacrifice FBT associated employment benefits unless they are high income earners. For the Average Joe on low income, it is probably wise to avoid salary sacrificing these items

Cars and their associated running costs, such as fuel and insurance, are probably the only employment benefit that can make sense to salary sacrifice. The concessionary FBT rate and employee contributions can make the salary sacrifice viable, but it ultimately depends on factors such as the value of the car, the distance travelled each year and your marginal tax rate. Careful calculations are necessary to find out if it is viable, and remember to take into account possible employment role changes because if you travel less it will cost you more.

Most other employment benefits do not attract concessions, and will be charged the full FBT. These include private health fund and life insurance fees, private travel costs, home mortgage repayments or rent, shares and bonds, non-employer provided child care or school fees, credit cards and home phone bills. There isn’t really any benefit in salary sacrificing these items, except for high income earners who may find it convenient.

However, certain employers are given full or part exemptions from FBT; although it is not unlimited and capped at a certain threshold. Hospitals, certain charities and non-profit organisations receive these benefits and their employers will find salary sacrificing some employment benefits to be to their advantage.

One thing is for sure – Apart from FBT-exempt items, salary sacrificing is a complicated matter. If anyone is considering salary sacrificing other employment benefits, they should seek professional assistance to ensure that they will be receiving a tax saving.