Rumours of more changes to superannuation have prompted a flood of emails asking whether it is still a worthwhile investment medium.
There is no simple answer - if you are aged 55 or over you are unlikely to be adversely affected by any changes, and should be able to continue using superannuation as an effective and legitimate way of saving tax. Keep in mind that there will be a tightly fought election within seven months, and Labor is unlikely to do anything too nasty beforehand. If the Liberals win, it will be a whole new ball game.
And, no matter what happens, superannuation remains one of the best investment vehicles for small business owners. They can make contributions of up to $25,000 a year, which are tax-deductible just like wages. If they do go broke, it is one of the few assets that are not available for their creditors.
The younger you are, the more you should be wary of it.
If you are 30 you can't touch it for another 30 years, so I suggest you rely on the employer contribution and do your own thing with any other spare money. It's a certainty that there will be many more changes before you turn 60.
Those of you aged around 45 are in the in-between zone where you need to weigh up the advantages and disadvantages of investing inside and outside the superannuation system. There is no obvious way to go. Superannuation is still the most tax effective way to invest - you need to decide whether you want to grab the tax benefits and take a chance on any changes that may come, or invest outside the system and limit the possibility of legislative risk.
Here is a case study of a 45-year-old who has been left $100,000 and has to choose between investing it in super, or investing it outside super.
For a fair comparison I have assumed the asset chosen is a portfolio which consists entirely of Australian shares paying franked dividends - the estimated total return is 10 per cent per annum made up of growth 6 per cent and income 4 per cent. The investor earns between $80,000 and $180,000 a year, which puts them in the 37 per cent tax bracket. This represents the majority of Australians who are able to invest.
If the money was held inside super, where the tax rate on earnings is 15 per cent, the after-tax return would be 11.7 per cent per annum thanks to the refund of the franking credits - if held outside super the after-tax return would be 9.6 per cent.
The returns are fairly close because the bulk of the earnings come from capital gains on which no tax is payable until the asset is disposed of. Presently, if the portfolio was held within super, the investor could start an account-based pension at age 60. The fund would then become tax-free and no capital gains tax would be payable if all the shares were cashed in.
It is unlikely the person who invested outside super would have to draw down on the portfolio until they were retired and had a small income. If that was the case, shares could be sold down progressively so that it would be unlikely any capital gains tax would be payable.
Based on these assumptions, the balance of the portfolio after 15 years would be $420,000 outside super and $573,000 inside super. The disparity in the numbers is due solely to the different tax rates and do not take into account any ongoing fees. The difference would be much less if the shares outside super were held in a low-cost ETF (Exchange Traded Fund) and the super fund had ongoing costs of 1.5 per cent per annum.
This case study reinforces the fact that every investment decision has advantages and disadvantages. It is up to every investor to take the time to work out which strategy is most appropriate for their goals and their appetite for risk.
Noel Whittaker is the author of Making Money Made Simple and other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org.