David French | 20/10/2010 2:38:04 PM

This article was first published in The Morning Bulletin under the heading Income Returns dated 18 September 2010.

The advent of compulsory superannuation in 1992 signaled a move away from the paternal role of Government, and toward self sufficiency of individuals. Baby boomers would start retiring in 20 years or so, and not only would governments be unable to afford universal pensions, baby boomers expected a higher standard of living than their forebears.

Eighteen years on confusion still exists. Many think that superannuation is an asset. It is not - superannuation is a special trust formed with the express goal of providing for an individual’s income needs during retirement. From cash to property to shares to art, the assets which can be held in the superannuation trust are broad. Comparing income yield across asset classes is not easy.

The income received from a term deposit is interest. It is received pre-tax and is simple to calculate. The income return to property is rent. Rent needs to be reduced for outgoings like rates, but increased for the tax advantages of depreciation allowance and the like. Share market investments return dividends, often with tax credits. To make a valid comparison with other investments, these have to be added to the cash received. Working this through, a dividend of 5 per cent will have an economic value 43 per cent higher than that of an equivalent term deposit. Of course, you have to accept that share prices can be volatile, but for longer term investors the income differential is clear.

Aside from absolute returns there is another reason why income yield is important - the more income being generated by the fund, the less assets you will have to sell to fund a given pension. Regardless of the asset class, the ability to manage income yield is a clear advantage of self managed super funds. Superannuation pensions paid by off the shelf funds typically provide no indication as to whether the pension is being funded through income, capital gain or return of your own cash. Assets are often being sold without the knowledge of the investor.

Also look out for losses in managed funds. Funds making a loss normally have to recover that loss before they can resume paying distributions. This year even some quality managed funds are not paying distributions, even though they have reported reasonable returns. Often there is nothing wrong with the underlying fund, its just they have been caught by the trust tax rules.

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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