A demonstrable way that an adviser can add value to a client is often to suggest that they make additional contributions into superannuation.
There are significant negative consequences of contributing to superannuation. For one, the funds aren’t accessible until a condition of release has been satisfied. This usually means 60 or older. (For me, that would mean I wouldn’t have access to these funds for more than 20 years!)
So why would an adviser recommend superannuation contributions? For the most part: tax advantages. For most people, income that is directed into superannuation (and income generated within the superannuation environment) is taxed much more favourably than if this income was taxed at their marginal tax rate.
Assuming the same rate of return, the difference over an extended period of time between investing $10,000 a year inside superannuation compared to outside of superannuation is profound. We’re talking potentially huge amounts of money over a lifetime.
From a professional perspective, there’s no two ways about it: in many cases, an adviser simply needs to recommend to a client with excess income that they make additional contributions to superannuation. It’s negligent not to. To do otherwise would probably be contrary to their statutory obligation to act in the “best interests” of their clients.
From this perspective, superannuation is a boon. However, from another perspective it is something that needs to be amended. As a citizen and tax payer, this concessional tax treatment represents income that the government would otherwise be entitled to, and isn’t getting. Reduced taxes are a form of “tax expenditure”, or a way of “spending through the tax code”. In the same way that a government needs a good policy reason for spending money, it needs a good policy reason for providing concessional tax treatment.
I understand the broad philosophy behind this. We want to encourage people to save for their retirement. And especially if we’re forcing people save (in the form of compulsory 9.25% superannuation guarantee payments that are automatically deducted from our pay) I can understand the need to give some benefit.
But in practice, the way the current policy works is that it acts as a form of regressive tax. With the removal of the low income super contribution (LISC), the lowest-earning people on tax rates below 15% are actually being taxed more on their superannuation contributions than the income they earn. Whereas people paying close to 50% in tax (because, good for them, they are earning significant incomes), can pay almost a third of the tax they would pay on their additional superannuation contributions. The outcome is that the wealthiest people get by far the biggest cut of the tax concessions.
And do these people need to be encouraged to save for retirement? I’m going to go out on a limb here and say no. My wife and I are likely recipients of the current policy. But do we need tax benefits to encourage us to save? No! Being in a position to retire is incentive enough.
Think about it this way: if the government was giving money to people, ostensibly for the purpose of encouraging them to save for retirement, and it was giving by far the most money to those who didn’t need it, would you be happy? That’s basically what’s happening.
This blog is made possible by Fairhaven Wealth, my independent, fixed-fee, advice-only financial advice business.
If you’re someone who would benefit from making additional superannuation contributions – great! I have no issue with you taking advantage of it.
But something that’s good for an individual in the context of current government policy is different from something that’s good for the country as a whole. In my view the policy as it stands is flawed and it’s something that needs to change. Especially at this time, where the government seems so focused on “balancing the books”, making superannuation concessions more equitable seems like low hanging fruit.