Adam Smith, CEO of Saxo Australia, said following the release of the government’s Intergenerational Report last week he is confident more people will see SMSFs as a more attractive option as a savings vehicle for retirement.
“What was present with the Intergenerational Report was that superannuation is going to be part of a nation-building initiative, which is a monologue the government has had going for a while now,” he told SMSF Adviser.
“In experience with our own clients, this is scaring a lot of people.
“Ultimately, if you go back 30 years when compulsory superannuation was established, its purpose was for people to save for themselves and invest in their own retirement.
“The early garnishing of wages was to support a better life after you stopped working.
“The government now, to my way of thinking, has decided that the trillions of dollars now invested in superannuation is a wonderful pool of savings that should be made available to use as it sees fit, which was not the reason superannuation was established.
“Where there is a lack of policy decision or communication around these things makes people scared and I think many will now see SMSF as a more attractive way to save for retirement.”
The attraction of an SMSF, he said, is that people have control of their savings, and are not at risk of having their retirement savings diverted to an initiative that they may not support such as defence, housing, or health.
“Ultimately it is your money,” he said.
“It is an interesting point we are at, and I believe the government should have taken these sorts of decisions [around superannuation] to an election.”
He said the pending legislation around the $3 million super tax is also a disincentive for people to put money into their retirement savings.
“People are being penalised for doing the right thing. The other thing is that compulsory super, now at 11 per cent going to 12 per cent, will see more people get to that $3 million mark,” he said.
“The tailwinds for that kind of super balance, especially in SMSF land, are well and truly evident and pushing people towards that cap.
“The government seems to be running a lot of ideas up the flagpole to see what kind of appetite the public has for them and is busy pushing towards the disassembling of the superannuation system.”
He said establishing an SMSF now is easier than ever, especially with the number of technology platforms available.
“Providers like us offer capabilities to manage your own super decisions. There is a lot of choice and people can make those choices with confidence,” he said.
“The beauty of an SMSF account is that you don’t have to be putting everything in one basket.
“But people do need to be educated [about investment]. A good test about an investment decision is asking yourself how much you know about the business you may want to invest in.
“The big role for Saxo and other providers is to educate. For a long time, Australians had a home investing bias, but that is starting to change.
“Investment opportunities overseas are huge, and investors are now getting access to international markets. Australia has become an exporter of investment capital, but we need to educate people about the opportunities out there.
“The younger generation gets it and can see the global investment landscape and see opportunities.
“People should invest in companies they understand. The beauty of an SMSF is that people are interested in doing their own research and they can express that in an SMSF as long as they are not putting everything on risky products.
“Literally, the world is your oyster. An SMSF is now much simpler and more cost-effective, and you just have to be prepared to invest some time and effort into it, but it is your money and you should be interested in where it should be invested and take a more active part in reaching your retirement goals.”
Adam: If you contribute concessional contributions to Super – they are taxed at 15% – and so is income on the remainder 85% till the money is taken out. Due to preservation rules (albiet some rare situations) these contributions and income on these contributions are locked in till retirement.
My calculations show this contribution tax plus tax on income (plus tax on income on income) is more than 100% of the initial contributed amount.
I sometimes wonder if Paul Keating realized that nipping just 15% every year will fund almost everything any future governments wants to do. By introducing more tax above $3M will simply make members withdraw (give to children for their home loans etc) and Treasury will even lose the 15% which they are currently enjoying. Chalmers – do not touch this honey pot – be happy with 15% !
You know, you are correct, Manoj. Of course, with this proposal has come a lot of thought about the current system and I have marveled at just how much can accumulate with sacrifice, diligent and persistent investing, compounding, and to an extent, luck. The government often put into place more incentives to save and those that were in a position to and that wanted to leave the funds available for future, independent living, were able to grow their funds, with the government’s blessing. I would guess that there is a strong sense of independence amongst many who have saved these funds rather than spending it.
I have marveled at how the funds have compounded over the years, and how the tax component payable every year on the those funds has also compounded. I have marveled at how my own super tax dollars are now paying to the Australian government, the equivalent of 2 couple pensions each year. Add in my partner’s superannuation tax and between us we pay 4 people their full couples pension or 3 single pensioners’ their full pensioner payments. Our personal taxes and business interest taxes pay far more than our individual cost to society in terms of hospitals, roads, roads and other infrastructure etc etc. I would not have looked at any of this but for this new proposal, but it is quite an eye opener, and explains why the top 1% (one) of earners pay 16.9% of the tax revenue.
The Intergenerational Report supports the idea of people saving to look after themselves in retirement. And if some of these funds go to help children of independent savers, I guess that this also helps the younger generation. In my case, depending on how long I live, there may not be too much left, but our plan has been that it should support us well into our late 80s if not early 90s, depending on health and longevity risk.
I am not so sure about how attractive SMSFs will be in the future. I guess it depends on what lays ahead. It may be better to only have the Employer Contribution go into super (or an smsf if enough funds permit) and invest anything else outside of super, where you will still have Asset Protection, but more control about movement of those funds and pay far less tax than under this new system.
In my case, the “30%” tax is in fact almost 47% – that’s because of the updated definition of income to include unrealised capital gains. I have given my workings in a previous article – there are no errors in the workings. The idea of a “30%” tax is deliberately misleading. That will make this tax far more than even the personal tax rates that come into play on 1st July 2024, given the flattening of the thresholds, and even after adding in the medicare levy.
For me, in retrospect, if this “30%” tax comes in, I would have preferred to have spent more of what I saved whilst I was young, adding it to my discretionary monies, probably traveling overseas, or purchasing expensive luxury cars, a holiday home or watches, etc with not much gain, if any, to the Australian government.
I would love to hear what Paul Keating thinks of this proposal. I see it as the death knell of superannuation. Employer Guarantees are servicing largely only the administrators of super funds and the companies that they invest in with very limited growth after the added effects of the administration costs, inflation (even at a lower 3%) and the current 15% super tax on earnings.
To help us better understand your situation, are you saying that the combined tax paid by both superannuation accounts is in the vicinity of $75,000pa ($1000+/fn x 3 single pensioners), meaning a combined taxable income in excess of $500,000pa?
Even if we allow for $8250 of this being tax on capped concessional contributions, it still suggests some significant returns of around $450,000+pa. Maybe you have some Div 293 or ECC tax in there as well.
That must be some nest egg in the background to generate that sort of annual return. You are to be truly commended and congratulated if you have been able to put this all together from your own efforts. Got an tips for us 🙂
What you do with your money in retirement is up to you, but if those figures are correct, it is difficult to comprehend that your funds could only support you into your 80’s/90’s?
Not sure how much sympathy you will get from anyone, apart from the rest of the ‘1%’ that you must be part of. I’d suggest that most people have more pressing financial concerns.
PS Take some comfort in the thought that if you had spent your money as you went, ‘they’ still would have taken their 9.09% cut as GST on a lot of it (or sales tax back in the day) and maybe even some luxury car and wine equalisation taxes, so they still get you in the end. Of course, you could go vegan and walk/ride a bike everywhere.
I guess you must be pleased that superannuation earnings have typically been taxed at no more than 15%. Imagine how much more tax you would have paid otherwise.
Hope you get to spend it all so your kids don’t have to pay death benefits tax on what is left.
PPS Might be some trolling, but this is not meant to be a personal attack, more so just putting some of your claims/comments into perspective from the average person’s viewpoint.
I intend to travel whilst I still can which I have not done. I have almost literally broken my back with work and enough is enough. I will also need help to stay in my home with dignity as I do not intend to move from my (high maintenance) home of 40 years – my broken back testament to why I can afford to do this. Happy to spend it and pay GST etc – I am used to paying lots of tax. I intend to eat lots of smashed avo on toast etc etc, with my favourite drink whenever I want, and enjoy things that I have not been able to because of work commitments, worrying about everyone else but myself.
At almost 47% tax it does not take a rocket scientist to realise that I am better moving everything out of super, so its not going to affect me. It just a nuisance of extra work. Its probably also a way to get out of a form of death taxes from what I have been reading, thanks to Chalmers who wanted us to all have a conversation about this. Depending on longevity risk, there may not be too much left regardless.
Sadly, with my back, I won’t be getting around too much on a bicycle.
PS: It was my choice to work, do without and save hard for my future, hoping that I lived long enough to enjoy it, as I didn’t want to be a burden on society. I don’t blame anyone for my lot, but I expect to be able to support myself and live with dignity and know that I have helped many along the way. If its not enough in some eyes, then that’s their problem, not mine.
PPS: Just putting your comments into perspective.
Cameron
I am not sure which La La land you belong to – but if you are one of the 80,000 who have more than $3M in super and a target for more tax – you have every reason to be upset.
The maths is very simple $10M and 5% return give you your $500K income for the year – forget about contribution tax and Div 293.
Reaching $10M is not difficult if you do not pay your home loan. Contributions will be made to maximum levels when rosy pictures of “NO TAX at 60” are waived at you. Also there was a time when deductible cotributions were $100K – add to that spouse splitting as one spouse is older and takes all the splitable contributions as he will will retire sooner and reach Nirvana.
It is not only the false promisses which need to be blamed – this is one group (80,000) who will pay more tax anyway even if you are on Pension. Even with $1.9M in pension – $1.1 remains in accumulation where income is taxed @15%
Some will have more in accumulation who are “OK” to pay 15% and as soon as you disturb the equilibrium – many will withdraw – not to invest with other tax structures – but to spend like VW.
Many have grown up kids – the money will go right back in – but in kids and in grand kids names – in accumulation – in 15% bracket!
Here are some tips on how to get to $10M
– Start early say age 25
– Do not pay off home loan – capitalize your home loan
– Salary sacrifice maximum deductible from day one
– Take your spouses 85% of concessional contributions
– LRBA for commercial property
– Repay loan with high income and high contributions in less than 10 years
– Sell asset after 5 – 7 years – should have doubled
– Buy a bigger commercial asset with a bigger loan
– Do all of the above several times – and by age 55 – 30 years – you should have $10M
Thanks Manoj – very succinct!
I used all of the points that you listed with some differences:
– I started saving when I was in 5th class with intention of one day owning a home from just 20c a week! 😀
– I did without a lot (basic, very rare holidays, no going out except for once a month pizza hut all you can eat treat, no furniture or second hand basics, not even carpet on rough concrete flooring which made me very ill) and worked 2 jobs even when I was a FT uni student – but I did have the benefit of a large chunk of university covered by the government thanks to Paul Keating and Bob Hawke. I took that leg up very gratefully and now have done this for my own children, with caveats (one degree paid for only, and them paying for any failed units to be redone).
– I didn’t use LRBA as I used Unit Trusts instead, partly funded through SMSF and partly using equity in home on-lending to a discretionary trust which purchased residual units.
– kept commercial properties which are always mostly tenanted and the building well-maintained (Covid was difficult when the govt decided landlords could bear the load to help tenants instead of the government – in my mind, the government’s role other than education, health and infrastructure, is to be there when times are tough. The commercial properties provide rent that is largely keeping up with CPI which is invaluable.
– just copied the last point a few times, growing the portfolio in terms of properties
And an added point:- the properties are always positively geared. Negative gearing makes not much sense to me, but interest should definitely be tax deductible and the government still gets it’s share of the profit, whilst you take on the risk (your home is collateral) and you do all of the work – not quite the ideal of passive income and there is always stress. No investment is truly passive except interest from the bank? Otherwise, you risk major losses – share market plunges etc. I learned early that you need to take responsibility for your own destiny, including financial destiny.
I can take some trolling – I believe in myself and I give back to society. And I take responsibility for my own situation. I just don’t like interference from a government intent on raiding funds simply because they can. We are not in a communist country last time that I checked.
The Many Adventures of Winnie the Pooh (Treasurer Chalmers). Pooh (Chalmers) is all out of honey (money) and thinks of the idea to steal some from the bees. Like Wnnie the Pooh, Treasurer Chalmers will end up in a mud puddle.