Is your superannuation safe from the tax man?

Being on a solid footing with superannuation reminds me of a situation not too long ago when I was on holidays walking along a river.

I came to a section covered in grass and reeds that I had to cross to continue my journey. The river was flowing along nicely and I could tell by looking at the current that there were rocks and other submerged obstacles below the surface which I could not see but needed to be mindful of. As I took my first step to cross over this section of grass and reeds I realised I was not on stable ground and a few times nearly lost my footing. I knew every step was going to challenge my stability and desire to stay relatively dry and unscathed.

When it comes to superannuation, I believe many Australians are feeling like I was on the river that day – uneasy – as the solid foundation that we rely upon to fund our retirement is constantly shifting. Last week, yet again, the government came out with proposed changes to superannuation and this time it wanted to attack capital gains tax breaks for self-managed super funds that invest in property.

Worse still, the government wants to attack those in retirement whose pensions are paid from their superannuation as currently there is no tax payable once your superannuation converts into pension phase.

The argument the government is giving us for the changes is that it wants to stop superannuation from being a tax haven for the rich. The issue I have is that the government wants to make changes that affect the many to curb the practice of so few, and if the changes go ahead the few will just change their strategy to minimise their tax in a different way. It is every Australian’s right to minimise their tax.

Compulsory superannuation has been in this country for nearly three decades yet the majority of Australians are retiring on very little superannuation. The average male is retiring on about $250,000 and the average female about $150,000, both of which are well short of what might fund a liveable income in retirement.

This failure of our superannuation system is the reason why currently about 75% of Australians are still retiring on some sort of government pension. Further, it is well known that as a country, as more and more baby boomers retire, we cannot maintain government-funded pensions at their current levels.

So why does the system fail to deliver results?

It may surprise you to know that when you are taxed 15% on your contributions to your super, that your fund needs to generate 18% before that tax on your contribution is returned to your fund. According to the Australian Prudential Regulation Authority (APRA), in the year to June 30, 2011, the average return on large superannuation funds is about 7.8% per annum over five and eight years.

This is consistent with research I conducted for my book How to Beat The Managed fund By 20% nearly 10 years ago. In short, over a 10-year period, bull or bear market, we can generally expect a return on our superannuation of about 7% to 9% per annum.

Given the above, any taxed contribution to your superannuation will take a minimum of two years to generate enough gain to get you back to square one, let alone contribute to your retirement, and depending on the market it can take three to five years.

My question is that if as a country we want people to be self-funded in retirement, why do we make it so difficult for the majority to achieve this goal?

Do not get me wrong; superannuation can be a great investment vehicle if used properly. However, I have long argued that Australians would be far wiser to build the majority of their retirement nest egg outside of super, and this is even more critical given the constant changes that occur in this area.

In creating wealth outside of superannuation, Australians will gain more control and flexibility over what they invest in and how their investments are managed. Further, they will gain much more certainty around when and how they retire.

Quite often capital gains with investing outside of superannuation can be much better, and yes, you can get better tax advantages, especially in the growth stage.

Regardless of my personal thoughts on the positives and negatives when it comes to superannuation, all Australians need certainty about how their superannuation will allow them to grow a retirement nest egg sufficient to support them in retirement.

Constant changes by successive governments only brings distrust and insecurity, and when you are in or nearing retirement age, these are two things that you do not need, nor deserve.