Is our super system flawed?

Did you know that Australia’s superannuation system is valued at $2.7 trillion and expected to grow to over $4 trillion by 2025.

And those dollars actually belong to everyday people who hope that one day their super will be enough to significantly supplement their income in retirement.

The problem is that many super funds underperform and even within the top 20 performing funds their 5 year average returns show a massive difference from a high of 11.01% down to 9.50%, and many Aussies end up with multiple accounts that see their balances eroded over time because of fees and duplicate insurance premiums that they just don’t need.

When the superannuation system was established about 30 years ago it was heralded as a means of raising employee benefits without increased wages in a time of wage freeze.

And the superannuation market was largely unregulated.

So, what has happened since?

Times change

Back in the 1990s, many people worked in jobs that aren’t as prevalent today – or might not even exist any more.

Of course, technological changes have also resulted in the creation of a huge number of brand-new jobs such as social media management and “app” development to name but two.

Plus, society has changed too, with the “one job for life” idea no longer relevant for many people.

The problem with having a number of jobs over your lifetime when it comes to your superannuation, though, is that it often results in multiple funds as I mentioned above with potentially vastly different performance returns.

In fact, a third of super accounts, or about 10 million, are unintended multiples.

And the excess fees and insurance premiums paid by members on those accounts add up to about $2.6 billion every year.

That is a lot of lost financial opportunity right there.

Also, many people don’t take charge of their superannuation, and leave the decision-making on where to invest their hard-earned money to their fund – who often invest overseas!

The thing is, superannuation can make a difference to your retirement if managed correctly, but it is not as efficient as it could be.

Is there a better way?

One idea could be for the superannuation to be taxed on exit as opposed to entry.

This will allow a larger superannuation balance to be accumulated which could reduce any top up pension.

Another is that those billions of dollars could be used to invest in Australian Infrastructure Projects Bonds which can almost be seen as a pseudo cash given the Government backing.

This will add to Australia productive capacity with long lasting benefits.

Given the compulsory nature of super there needs to be more stringent supervision to ensure that every Australian gets maximum benefits for their investments as opposed to what can be described as a bottomless income stream to support the regulated funds which is seeing their fees growing at an alarming rate versus the benefits to the members.

Putting Australian first I suppose you could say.

All of those extra funds would stimulate the economy, which in turn would create jobs that create the income that so many people need to contribute to super in the first place.

Seems like a simple idea doesn’t it?

Another option could be to use some of the funds to subsidise childcare for working mothers, or after-school programs to keep our youth active and socially engaged, thus causing less despondency and more productivity by the time they leave school.

The Royal Commission into the financial services sector has uncovered a number of issues, with poorly performing super funds being just one of many.

There is no question that our super system needs an overhaul with too many Aussies stuck in underwhelming funds or having multiple funds that drain their balances.

The bottom line…

One of the reasons why so many people are complacent is that they don’t have the financial literacy to understand how they can use their superannuation to create a better life in retirement.

I know I talk about financial education a lot, but that’s because it’s a major issue.

If more Aussies cared more about their superannuation balances because they understood it was their money to start off with, then they would likely have better financial outcomes.

And that could mean tens or even hundreds of thousands of dollars difference to enjoy their twilight years.

Of course, another way to outperform is to take control of your superannuation and set up a Self Managed Super Fund.

Now this doesn't suit everybody, but if you fit the bill and your independent financial planner believes setting up and SMSF is right for you, you could benefit in a number of ways:

1. You could consolidate your various super funds as well as consolidating the super assets of up to four members and now up to six members (usually family members or business partners) into one larger pool of funds, which increases investment opportunities.
2. Have flexibility withmore investment options. Trustees can invest directly in shares, high-yielding cash accounts, term deposits, income investments, direct property, unlisted assets, international markets, collectables and more.
3. Tax effectiveness:Like all super funds, SMSFs benefit from concessional tax rates but in an SMSF any tax payable is usually postponed compared to the APRA funds where the tax is taken out when the contribution is made to the fund
4. The cost of administration could be reducedusing an SMSF as the costs are based on the time taken to prepare as opposed to a percentage fee.
5. Increased transparency and control. You’re in control of your SMSF’s meaning you can chose where and how you invest and you will have a better understanding where your money is invested, with complete visibility over performance and tax treatment.
6. Currently you can increase the size of your nest egg through leverage.And at present you can purchase residential property with debt, you can also create equity through renovations and improvements.
7. Estate planning:Having an SMSF provides the flexibility to plan who receives the member’s death benefits, when they receive it and how they receive it, such as what type of  pension or lump sum.

The bottom line:

It’s no secret, however, that the superannuation landscape can be complex. That’s why many SMSFs access professional guidance before they establish their own super fund as well as during its duration.

So if you’re wondering whether a SMSF is the right investment vehicle for you, consider speaking to Metropole Wealth Advisory so we can help you understand all of the benefits mentioned above, as well as many more.

Why not contact us to discuss your individual needs & let Ken Raiss, director of Metropole Wealth Advisory, formulate a Strategic Wealth Plan for you, your family or your business.

Please complete click here now and set up a time for a chat

Disclaimer

The article is general information only and is intended as educational material. Metropole Wealth Advisory nor its associated or related entitles, directors, officers or employees intend this material to be advice either actual or implied. You should not act on any of the above without first seeking specific advice taking into account your circumstances and objectives. 

About Ken Raiss Ken is director of Metropole Wealth Advisory and gives strategic expert advice to property investors, professionals and business owners. He is in a unique position to blend his skills of accounting, wealth advisory, property investing, financial planning and small business. View his articles