With superannuation set to boom, how will this affect us and our property investments?
The Australian superannuation system is something of a marvel in many respects. Of course, as I’ve mentioned many times, the system has a great many flaws.
Fund managers charge ever higher fees as your super balance increases (based upon the balance under management) and many funds are heavily exposed to volatile stocks as unsuspecting employees approach their retirement.
When times are good this tends to pass by unnoticed, but when we have a stock market crash as was seen through the financial crisis, the press has a field day.
And all the while the fund management fees, insurance premiums and taxes gnaw away at your ability to generate an adequate pension.
But…at least it’s a system!
Any yet, for all of the system’s failings…at least we have got the superannuation system!
In so many countries, there is no coherent pension structure and therefore a large percentage of the population do not think about or plan their retirement until very late in their working lives.
The compulsory contributions to superannuation in Australia ensure that today, even from a young age, Aussies begin to build a pension pot.
Although it is fairly well known that historically many super balances at retirement have been inadequate this will begin to improve as a greater percentage of those hitting the retirement age will have contributed to the scheme for their whole working lives.
Australians already have one of the most successful pension schemes per capita in the world.
Contributions are set to increase from 9% to 12%
Super contributions are set to increase from 9% to 12% meaning that there will be an ever greater balance under management, the figure already reportedly approaching $1.5 trillion, a figure which will almost certainly continue to increase as the population grows and new young employees pay contributions as soon as they join the workforce.
The increases will be implemented thus as noted by the Australian Taxation Office here:
Who pays for the extra contribution?
It will be employers who will be required to pay the extra 3% which, on the face of it, is great news for employees.
However, do be aware that employers may look to cut back on salary increases in order to cover the additional costs.
Employing staff is becoming a very expensive business in Australia with on-costs increasing seemingly all the time.
The net effect over the next decade or so may be that salary growth could stalld a little but pension balances increase.
Why the increase?
The contributions are being increased for a number of reasons.
As compulsory super contributions have only been in place since 1992, there are still many Aussies retiring with only meagre balances in their fund and thus relying almost exclusively on the modest Age Pension.
Over the next decade it is expected that an extra $85 billion of super savings will be created by the changes.
How can you capitalise on the trends?
More Aussies than ever before are turning to self-managing their superannuation via a self-managed superannuation fund (SMSF).
If you have a super balance which is approaching 6 figures, you may consider that you want to do the same.
This has the advantage that you will no longer have to pay a fund manager for the privilege of a net return which is rarely materially better than that of the stock market index.
SMSFs do retain some compliance costs, which is why it is preferable to have a balance approaching $100,000 before switching to self-management.
If your balance is significantly less than this it is possible to pool funds, perhaps with a spouse in order to make the self-management process more efficient.
The additional savings going in to super will certainly be a boon for the share markets over time.
Interestingly SMSFs are also now able to invest in property, which will gradually also see increased investor activity in the residential property markets.
Lenders generally require a healthy deposit for a SMSF mortgages of perhaps around 30% or more and therefore many SMSFs cannot afford to buy expensive investment properties.
For this reason, I’d expect much of the increased activity to be in the low-to-median price bracket, and particularly for many SMSFs to elect to invest in apartments in the capital cities.
Investors often have a tendency to gravitate towards apartments rather than houses due to the lower maintenance efforts required.
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