Super beyond the gloom
By Robin Bowerman
13th February 2009
Principal & Head of Retail, Vanguard Investments Australia
Any individual presenting a case for superannuation at this time may seem bold and outspoken in the midst of falling returns.
Take veteran tax and superannuation lawyer Robert Richards who has just described superannuation as the "easiest, safest and most tax-effective of all tax planning".
In the February issue of the Law Society Journal of NSW, Richards has written: "The strategy is simple; one contributes as much as one can by way of tax-deductible [concessional] contributions to a superannuation fund whose income is then subject to, at most, 15% tax, and in due course one withdraws those contributions and that income as a tax-free pension or lump sum." (For employees, this involves making salary-sacrificed contributions.)
Richards, of course, has simplified the tax treatment of super for his article but his point is crystal clear: From a tax viewpoint alone, the attractions of super are compelling for many members. And Richards in his numerous years practising tax law would have come across many tax-planning arrangements that would have varied considerably in tax effectiveness.
His comments in the Law Society Journal were strictly on what he considers the tax aspects of super.
However, it should be said that even with this bear market and the double-digit negative returns for 2008 of the balanced default portfolios used by more 80% of fund members, super remains a highly effective way to save for retirement. And that's not only from a tax perspective. (Typically, balanced portfolios are diversified 65-75% in growth investments with the remainder in defensive assets of mainly bonds and cash.)
Understandably, you may say that excellent tax breaks seem of little worth, at least over the short term, given that the value of your super would have been hit so hard by the sharemarket.
But always keep in mind that super is not an investment in itself - it is a concessionally-taxed vehicle to hold investments. It is crucial that the investment mix within the fund is right for you.
Perhaps a valuable exercise in the first few months of this year is to consult a quality financial planner about whether the long-term asset allocation of your superannuation portfolio is appropriate for your circumstances.
This is certainly not to advocate a sudden change in asset allocation to, say, more conservative assets. Indeed, such a change could prove extremely costly, depending upon the circumstances, if it involves moving out of shares at extremely depressed prices. However, it is worth checking from time to time whether your asset allocation needs any fine-tuning.
A key role of financial advisers should be to improve the financial literacy of their clients including about the vital role played by a portfolio's asset allocation.
This leads to a wider point that many investors, including super fund members, would possibly have coped better with the severity of this bear market if they understood more about the basics of how investment markets operate and how a portfolio's performance in all market conditions largely reflects its asset allocation.
Informed investors are much less likely to panic and dash to cash whenever share prices sharply fall. Without doubt, ignorance breeds fear.
You may have missed a statement, Superannuation in the context of the global financial crisis, released early this month by a group of nine influential industry bodies representing investment markets, superannuation funds and financial planners. It should make next month's reading of your fund's interim statement from your fund more understandable - and more tolerable.