David French | 18/02/2009 3:37:17 PM

This article was originally published as ‘Superannuation is not the only money option’ in The Morning Bulletin in March 2002.

Putting money into superannuation is all the rage. Many financial planners are using superannuation as the first and only stop when recommending what customers should do with their money. The logic is that there are significant tax gains from investing in superannuation.

This is true. If you are earning up to around $85,000 employer contributions to superannuation are taxed at only 15 per cent so there is a significant immediate tax saving from putting money into superannuation.

For people who earn above this amount the tax rate on the superannuation contributions increases to a maximum of 30 per cent. This is where the “super as the answer to everything” argument falls apart. For instance people earning over $103,000 pay tax of 30 per cent on contributions to superannuation. If these people take more than about $106,000 from super as a lump sum, then they pay an additional 15 per cent tax on the extra amount – so total tax paid on the capital value would be 45 per cent. This is only slightly less than the top tax rate. For a high income earner, income accruing to the fund would be taxed at the rate of 15 per cent as it is earned, and 15 per cent when it is withdrawn – there is still a benefit here, but whether it is worth pursuing depends on your exact circumstances.

You can also put ordinary money into superannuation. These contributions are not taxed at all, and earnings are taxed at only 15 per cent but you need to compare other investment options and decide whether you want your money locked up.

Allocated pensions are a type of pension that can be paid by a superannuation fund. Very favourable tax rates are applied to allocated pensions – so much so that a significant amount of money can be received tax-free and they have social security advantages under the incomes test. Complying pensions are more draconian but can enable the owner to receive tax fee income and get around both social security means tests.

The overriding issue with superannuation is that until you have retired with the intention not to work again, or have turned 65 and are no longer working, the money is locked up. That means LOCKED UP. You have to be on your death-bed to get at any of it and even then you will get only dribs and drabs.

Superannuation is just one of a number of tools available to increase your wealth. The issues for someone who is 25 are completely different from someone who is 55. Don’t be bullied into it and make sure that you understand all of the restrictions and associated benefits before you commit your money. Paying off your home might be just as beneficial, as might using other investment vehicles.

The Investment Collective (AFSL 471728) is a non-aligned financial planning and investment firm specialising in providing tailored financial and investment advice for individuals and small business. Capricorn Investment Partners Limited's services include financial planning, share trading, portfolio management, insurance broking and self managed super fund administration. Additional information on services provided by The Investment Collective Limited can be found by following this link. Readers are reminded that this document has been prepared for general information purposes only, and any advice contained herein has been prepared without taking into account your financial objectives, situation or needs. Readers are advised to see their financial advisor prior to acting on any general advice.

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