The Mystery of Superannuation Superannuation has become the second largest asset class of most people, after the family home, and yet people generally have not bothered to understand superannuation at all.
We feel that we understand bricks and mortar far better than investing in funds (which we think is superannuation).
This probably explains why many are confused about investing and use superannuation to blame, as it is a case of fear of the unknown and a popular catchcry.
You have probably seen that within superannuation there are hundreds of managed funds with different investment strategies and have become confused.
Did you know, that there is a mirror image of these managed funds outside superannuation? The only difference is the tax treatment and the redemption rules of superannuation.
So it isn't surprising that we quickly get confused by the complex rules of superannuation and wrongly shoot the messenger by blaming the investments rather than the rules.
Superannuation is taxed differently to other investments and as a consequence there are certain rules applied to qualify for this special tax treatment.
End of story! That's it! How complicated it that to understand? Superannuation is an investment just like any other investment and if one keeps that point in mind, all the mystery falls away.
The tax treatment is different.
The tax treatment of superannuation funds is used as an incentive to save for retirement and an alternative to investing yourself.
There has been considerable mis-information when comparing superannuation and bank deposits.
Wrongly people have thought that a bank deposit was superior to superannuation, not realising that it can also be a superannuation investment.
One can invest superannuation money in bank deposits just as you would do independently, so it isn't a case of one investment or the other, as you have a choice.
To explain further let's compare apples with apples Let's compare the same type of investment to demonstrate investment into superannuation is financially better than investing it directly yourself.
Let's say that the person doing the investment is on a tax rate of 35% and let's say that they are considering an amount of $10,000 to invest.
Scenario 1 Deposit $10,000 into superannuation from 'before tax' income.
There is a 15% tax on superannuation investments and earnings which is paid to the ATO by the superannuation fund $8,500.
00 Interest from Bank deposits @ 6.
75% = $573.
75 (taxed at 15%) $487.
69 Total balance at the end of year $8,987.
69 Scenario 2 $10,000 (after personal tax of 35%) $6,500.
00 Interest @ 6.
75% on $6,500 =$438.
75 (taxed @ 35%) $285.
19 Total balance at the end of first year $6,785.
19 Conclusion Superannuation is ahead of a bank deposit in your own name by $2,202.
50 ($8,987.
69-46,785.
19) at the end of one year because of the favourable tax treatment of superannuation investments.
So what is that brouhahas about superannuation investments losing money? The same tax scenario applies if one compares like investments with like.
In this example, superannuation could have sustained a loss of a 24.
5% and still have been slightly better than an investment in the bank, outside of superannuation.
What was that about superannuation being complex? The message is to learn the superannuation rules or seek investment advice from an expert and not be swayed by misinformation.
Anyone can compile information.
But you need experience to interpret information to give it value Jim Gleeson