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Is super still worth it?

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With the ruckus in the media, you would be excused for thinking that superannuation should be avoided like the plague. The headlines over the past couple of months have been either awful or just confusing.

Quite a few politicians seem to have no idea of their party's position on super, let alone basic facts. Fear and loathing are the mood of the day. I think we all understand super is overly skewed to high-income earners and, in particular, to high income earners aged 60-plus who have a most confusing-sounding "transition to retirement pension", which becomes even more confusing when it is referred to as a TTR pension.

Labor's Bill Shorten has said that super has unsustainably generous loopholes. The Greens reckon that it is a tax haven for the wealthy. A major newspaper said that it is certified money laundering for the rich. All parties have plans to lower its very strong bias towards the wealthy.

superannuation

Fair enough. But hang on a minute. Has super become the equivalent of an illicit Cayman Islands stash of money?

Let's introduce a bit of common sense and reality into the debate. First, I agree, that higher-income earners take too great a share of the tax concessions available. Let's pick on me. As a 60-year-old I have converted to a TTR pension. In English, this just means that I have ticked the box in my super to receive a pension. That is nice and simple. All it means is I am required to take a minimum 4% pension. This comes to me tax free because I am older than 60.

But because my super fund is now a pension fund I no longer pay 15% tax on the earnings - that is a pretty cool deal for me and many others like me. But I am not a retiree; I am in transition to retirement, which in my case I hope is ages away. And because I am working and over 50, I can add $35,000 in pre-tax dollars to super.

Hang on, I hear you thinking. Your fund is no longer taxed. You take out a pension tax free. On $35,000 of your income, on which you would normally pay some 50% tax, you now pay 15% tax as it is going into super. Sure, I'd pay an extra 15% tax if I was earning a higher amount (we'll need to see what happens to legislation on this issue) but, regardless, it is better than nearly 50% tax. If you think this is too generous to me, you are correct. So I support the proposed changes, which mean I will pay more tax.

But this intense debate is distracting us from the truth. The truth, regardless of the proposed changes, is that:

  1. Super is a fantastic investment for high-income earners. It may not be as ridiculously fantastic as it was but it is still highly tax advantaged.
  2. Super is a fantastic investment for nearly every Australian who is eligible to take advantage of it. My only reservation is if you pay no tax and will never pay tax. But that is not too many of us.

The level of allowable contributions may be lowered and I have no doubt we will see more changes. But the reality is that the vast majority of Australian workers will have some 9.5% of their salary put into super at a 15% rate of tax.

This is a lot lower than what the average person pays on money taken home in the pay packet. In a super fund, tax will be charged at the heavily discounted rate of 15% on its income. When we retire or get close to retiring - and I would argue certainly at a typical retirement age - our super money will come out tax free.

So my advice is to ignore some of the heat in the super debate and shine a light on the benefits. In fact, I think you may well see the wisdom in the campaign by Money and ASFA to add more to your super. Visit superboosterday.com.au to find out more.

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Paul Clitheroe AM is a respected financial adviser and Money's founder and editorial adviser. He is chair of the Australian Government Financial Literacy Board, and author of several personal finance books. Click here to email Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section.
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