Superannuation Made Simple 5th Edition Sample by Love Australian Prawns

NOEL WHITTAKER’s

guide to all things superannuation

Superannuation e l p m i S e d Ma

U P DATE D for 2023/ 2024

Superannuation Made Simple by NOEL WHITTAKER

The laws relating to superannuation, taxation, social security benefits, and the investment and handling of money, are constantly changing and are often subject to departmental discretion. While every care has been taken to ensure the accuracy of the material contained herein at the time of publication, neither the author nor the publisher will bear responsibility or liability for any action taken by any person, persons or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take other action on reliance of the material contained herein, but instead should satisfy themselves independently (whether by expert advice or otherwise) of the appropriateness of any such action. Other best sellers by the same author MAKING MONEY MADE SIMPLE GETTING IT TOGETHER GOLDEN RULES OF WEALTH SHARES MADE SIMPLE BORROWING TO INVEST WINNING PROPERTY TAX STRATEGIES BEGINNER’S GUIDE TO WEALTH RETIREMENT LIVING HANDBOOK DOWNSIZING MADE SIMPLE 10 SIMPLE STEPS TO FINANCIAL FREEDOM

MORE MONEY WITH NOEL WHITTAKER LIVING WELL IN RETIREMENT CONTROLLING YOUR CREDIT CARDS DRIVING SMALL BUSINESS LOANS MADE SIMPLE MONEY TIPS AGED CARE, WHO CARES? 25 YEARS OF WHITT & WISDOM RETIREMENT MADE SIMPLE

SUPERANNUATION MADE SIMPLE (5th edition) First published in Australia in 2017 by Noel Whittaker Holdings Pty Ltd This edition published in October 2023 by Noel Whittaker Holdings Pty Ltd Visit our website at www.noelwhittaker.com.au © Noel Whittaker Holdings Pty Ltd 2023 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the publisher.

ISBN 978-0-6459675-0-0 (PDF ebook)

Cover design by Sharon Felschow, dta studio Typeset in Australia by dta studio, Brendale, Queensland, 4500 Printed in Australia by McPhersons Printing Group, Victoria Author photograph by A J Moller Cartoons by Paul Lennon 10 9 8 7 6 5 4 3 2 1

ABOUT THE AUTHOR International bestselling author, finance and investment expert, radio broadcaster, newspaper columnist and public speaker, Noel Whittaker is one of the world’s foremost authorities on personal finance. Noel reaches over seven million readers each week through his columns in major Australian newspapers in Sydney, Melbourne, Perth and Brisbane. He is a contributor to magazines and websites, and appears on radio and television. Noel is one of Australia’s most successful authors, with 23 bestselling books achieving worldwide sales of more than two million copies. His book, Making Money Made Simple, set Australian sales records and was named in the 100 Most Influential Books of the Twentieth Century. His new book Retirement Made Simple is now on the best seller list as well. For 30 years, Noel was a Director of Whittaker Macnaught, one of Australia’s leading financial advisory companies, with more than two billion dollars under management. He relinquished all interests in that business in 2007. In 2011 he was made a Member of the Order of Australia for service to the community in raising awareness of personal finance. Noel is now an Adjunct Professor and Executive-in-Residence with the Queensland University of Technology and a member of the Australian Securities and Investment Commission (ASIC) consumer liaison committee.

CONTENTS The fundamentals Superannuation — a money paradise ............................. 1 The ageing population ...................................................... 4 Will there be a pension when I retire? ........................... 6 Superannuation — what is it? .......................................... 8 Why we don’t like superannuation ................................. 9 It’s a box not an asset ..................................................... 11 The carrot and the stick .................................................. 13

Contributions The way it used to be...................................................... 14 1983 — the year it all changed ...................................... 16 What’s the point? ............................................................ 20 Who may contribute to superannuation ...................... 21 Types of contributions .................................................... 24 Splitting your super with your spouse ......................... 28

Taxes on super Contributions tax ............................................................ 30 Is superannuation taxed three times? ........................... 34 Can I claim a tax deduction? ......................................... 35 Tax on the end benefit.................................................... 38 Salary sacrifice ................................................................ 40 Salary sacrifice for the young ....................................... 42

Types of funds What type of fund you are in ........................................ 44 Defined benefit or accumulation fund?........................ 51 Risk .................................................................................... 53 The right assets for your fund ....................................... 55

Your own self-managed fund Start your own self-managed fund? ............................. 58 Running your own fund ................................................. 61 Which assets to buy? ...................................................... 63

How much? How much can I have in superannuation? .................. 66 How much superannuation do I need?......................... 67

Access to your superannuation Access to your superannuation ..................................... 69 Changing jobs .................................................................. 72

When you retire Drawing your superannuation when you retire .......... 74 Tax benefits of annuities and account-based pensions ..................................................................... 76 Account-based pensions ................................................. 78 Transition to retirement pensions (TTRs) ..................... 81 Retirement income streams ............................................ 84 Comprehensive income products for retirement (CIPRs)............................................... 86 Lifetime income streams ................................................. 87 A tax-free retirement ...................................................... 89 Investing after retirement............................................... 90

What happens when you die? Superannuation and death ............................................. 92 Binding nominations ...................................................... 98

Strategies Saving on life insurance............................................... 100 Creating a sinking fund ................................................ 102 Safe as a bank!! ............................................................. 106 Saving capital gains tax ............................................... 108 The guaranteed secret of wealth...................................110

Gifts from the government Spouse rebate and government co-contribution ....... 113 Superannuation and Centrelink................................... 116

Other issues Superannuation and relationship breakdown............ 118 Superannuation and small business ...........................120 Getting engaged ............................................................123 Where to now?...............................................................126

Glossary ..........................................................................128 Appendices Life expectancy table 2017 .......................................... 131

1 The fundamentals

Superannuation — a money paradise We all want to save tax and if you go to a social function you can bet that somebody will be complaining about the level of taxes in Australia and how the government should do something about it. Yes, we are highly taxed here with income tax of nearly 40% cutting in at a moderate level of income and capital gains tax of almost 50% if you sell an investment within a year of buying it.

But if I told you about a country that had income tax at a flat rate of just 15%, no Medicare levy, and capital gains tax of just 10%, I’ll bet you’d be tempted to migrate to it, particularly if you discovered that once you retired there was no income tax to pay at all. 1

Superannuation Made Simple

Well, the good news is that you don’t need to migrate. You can have it here in Australia right now! All you’ve got to do is keep your money in a wonderful vehicle called superannuation. The problem is — we are cynics. Anybody who knows about money understands that superannuation is one of the greatest investment vehicles around but unfortunately there is a general perception that it is something to be wary of. Whenever I give a seminar on superannuation I start by asking audience members “who love superannuation” to put their hands up — there’s a very small response. The next question is “who hates superannuation” which usually results in a few hands going up. By now most of the audience have not responded in a positive or a negative way so my final question is, “who is confused about superannuation?” Invariably this results in a sea of hands. It’s obvious that most people are mystified by superannuation but the good news is that for most people it need not be complex at all. Certainly there are some extremely complex regulations but these tend to apply to very wealthy people, or to special cases such as immigrants. For 99% of Australians the rules are simple and, when you finish this book, you should realise what a simple and valuable vehicle superannuation is. Superannuation is the only vehicle that lets you grow assets in a low tax area and then convert this to a zero tax area when you retire. When you question those who dislike superannuation you find that their objections are usually “the rules keep changing”, “you lose control”, “there are too many taxes”, or “how do I know there will be any money left in superannuation by the time I 2

Superannuation — a money paradise

want to retire?” These responses are understandable but as you read on, you will discover that many of the rule changes have been beneficial and in most cases the taxes are far less than you would pay if you didn’t take advantage of superannuation. Anyway, if control is what you want, you can always have your own self-managed fund. So it’s time to change your thinking. Superannuation is almost certain to play a major role in your investment program and, used wisely, will be one of the best tools available to speed you on the way to wealth. No other vehicle allows you to grow assets in a low tax area and then convert this to a zero tax area when you retire. Stay with me and we’ll talk about why you need to build wealth for when you retire. My goal is to have you not just understanding but loving your superannuation when you come to the end of this book. For this reason the major points and important case studies are repeated in some places.

The ageing population The swing towards superannuation has been pushed along by the growing realisation that the number of workers supporting each non-worker is decreasing rapidly. This is because of job losses caused by advances in technology, falling birth rates, and the simple fact that people are living longer. In 1901 only about 48% of males and some 56% of females reached 65. Today average life expectancy is 82 for men and almost 86 for women. Thanks to a growing awareness of diet and exercise, as well as medical break-throughs, we can expect to continue this trend to a longer lifespan. In America the fastest growing group is the over 100s whose numbers have reached a level where the radio stations do not bother to send them birthday calls any more.

The ageing population

Before the Industrial Revolution people aged 65 and over were less than 3% of the population — today they are nearing 15%, and are forecast to be 25% of population by 2030. Your grandfather almost certainly started work at 16, retired at 65 and died at 68. Your children may well start work at 22, retire at 60 (if they can afford it) and live till 95. That means a huge amount of their income will need to be set aside to support them when they stop work. When you think about our dropping birth rate, and the increasing number of young people who are attending universities and similar institutions, you may start to wonder who is going to be working to pay for all those who aren’t. According to United Nations figures, the ratio of working taxpayers to non-working pensioners is 3:1 now but is expected to tumble to just 1.5:1 by 2030. This begs the question: “who is going to pay for your retirement?” There is little doubt that our welfare system, and our health system, will be unable to continue to provide the current generous benefits. Those who don’t make some provision themselves for their retirement may have a very Spartan existence indeed. This is why superannuation is so important.

Will there be a pension when I retire? “Will they take away the aged pension?” “Will unemployment benefits be slashed?” They are common questions but the conventional wisdom is that these things won’t happen as no government would be brave enough. After all, who is going to risk the huge voter backlash it would cause. True, if it were done in one fell swoop, but who is going to notice if it is done little by little? In 1968 both income and assets were counted for pension eligibility, and then in 1975 the means test was removed for persons aged 70 to 74 inclusive. In 1978 the means test was reintroduced for people over 70.

Will there be a pension when I retire?

A few years later the government of the day introduced an income test and followed this in 1985 by widening the test to include assets as well. In 1987 the income test was expanded to include bonuses on insurance and friendly society bonds, and in 1988 the government introduced the concept of deeming whereby some managed funds were given a notional earning rate of 11%. This was later extended to money in bank accounts but the first $4,000 was exempted to give pensioners some cash money. In March 1997 that exemption was removed and the deeming started from dollar one. The pension eligibility rules are continually being tightened. Then came the raising of pensionable age for women. Since 1910 it had been 65 for men and 60 for women in recognition of the fact that women tended to have broken employment histories and less chance to save. In 1995 it was decided to “level the playing field” on the grounds that women had now achieved equal status with men. There have been no dramatic changes — the raising of the pension age for women to 65, the same as men, was accomplished in 2013. Currently it is rising in stages until it reaches 67 in July 2023. In January 2017 the assets test was tightened still further with changes in the taper rate. Will there be a pension for you? Who knows? What we can say is, based on what has happened to date, it probably won’t be much.

Superannuation — what is it? The aim of superannuation is to encourage you to invest money during your working life so that you can live off it in retirement. The best way to think about superannuation is that it is a process whereby you deprive yourself of money to spend now so it will be available to spend when you retire. Superannuation rules relate mainly to tax concessions to encourage you to do it, tax penalties if you try to squirrel too much away, and ways to stop you withdrawing it too soon. We usually talk of two phases in the life of an investor: 1. The accumulation phase — this is when you are working and adding to your superannuation. 2. The draw-down phase — when you are living off your superannuation and its earnings. If you have changed jobs and are still working, you may be in both stages at the same time. This could happen if your present employer is making contributions to superannuation for you, while accumulated superannuation benefits from previous jobs are invested and you are drawing an income from your super fund.

Why we don’t like superannuation Despite the publicity given to superannuation and the amount of money spent on advertising its benefits, there are still many who are suspicious of it. There are two main reasons for this. The first is usually caused by a bad experience with superannuation, which can often be traced back to high fee regular contribution plans that were sold hard in the 1970s and the early 1980s. Sometimes as much as the first two years’ contributions were eaten up by fees and the policies carried heavy exit penalties if the contributor tried to move the money to a new policy with a different company or withdraw it prior to the policy’s maturity date. These policies often contained an element of life insurance as well and the premiums for this were debited to the superannuation account. In the early stages of the policy when the account balance was small, the combination of initial fees, annual management fees, insurance premiums and contributions tax meant that the contributor saw little, if any, gain. Naturally, the reaction was “superannuation is no good!” Thankfully those policies are seldom sold now but it is important to understand that superannuation is merely a vehicle that lets you hold assets in a low tax environment and eventually withdraw the money as a lump sum or as a private pension. Used properly, superannuation is one of the most effective vehicles available to help you save tax. 9

Superannuation Made Simple

The second reason for suspicion is the bad publicity that occurred when world stock markets tumbled in 2001 and 2002, then crashed due to the global financial crisis in 2008 and were smashed again in 2020 when the coronavirus hit. Most superannuation funds had a major part of their assets invested in both Australian and international shares and of course the value of most people’s superannuation account fell in line with the falls in stock markets around the world. If you hold assets and they fall in value, the outcome will be exactly the same whether you hold them personally or if they are owned by your superannuation fund. The media, who love to use scary headlines to sell papers, had a field day with headlines like “billions of dollars wiped off superannuation”. Of course it reinforced the suspicion of superannuation that was held by the average Australian and, when they got their statement for the year showing how much the balance had fallen, the typical reaction was “I could have done better myself” or “I would have been better off leaving my money in the bank”. What they failed to understand is that superannuation is simply a vehicle that holds assets. If you hold shares in XYZ Limited and they fall in value, the outcome will be exactly the same whether you hold them personally or they are owned by your superannuation fund.

It’s a box not an asset In this chapter I’m going to introduce you to a concept that will run throughout the book. You need to understand this concept if you are to make the best of your superannuation. Unfortunately, far too many people see superannuation as an asset class, just like a house or a share, when in fact it is nothing of the sort. It is merely a vessel or a structure in which you hold assets in a low tax area. You could even call it a big money box if you like.

Now, if you’ve got a money box full of money and you entrust it to someone else for safekeeping and they run off with it, you may have lost both your money and the box — but it’s not the fault of the money box. Similarly, if you fill that money box up 11

Superannuation Made Simple

with dud coins and find that the contents are worthless when you come to spend them, that’s not the fault of the box either. Superannuation is not an asset like shares or property — it is a vehicle that lets you hold money in a low tax area. As I pointed out in the previous chapter, most superannuation funds produced negative returns when share markets around the world plunged because they had a large part of their investments in shares. This led many unsophisticated investors to say things like “superannuation is no good — the returns are lousy”. Consequently they took their money out of superannuation, paid a hefty exit tax in some cases, and then found themselves in the position of investing the proceeds in the same assets but in an environment where the income tax and capital gains tax were much higher. Just remember that superannuation is just another entity that can buy and sell assets. If you own shares or property, either in your own name or in the name of your superannuation fund, you will suffer exactly the same loss if the market falls and they go down with it. So don’t shoot the messenger. Once you come to terms with the fact that superannuation is simply a structure in which you hold assets in a low tax area, you will treat it as a tax saving vehicle and won’t blame it when the market falls.

The carrot and the stick To make superannuation effective, the government adopts the twin approaches of encouragement and coercion. The encouragement is in the form of tax breaks; the coercion comes through the compulsory superannuation laws that require all employers to contribute 10% of each employee’s salary to superannuation. Because it is vital to the working of the system that the money is used for retirement and not spent before that, there are also rules that prevent you accessing much of your superannuation money until you retire. In cases where you are allowed to withdraw your money before retirement, there are penalties in the form of an exit tax of up to 20% plus Medicare levy.* We’ll discuss all of this later. At this early stage just be aware that tax breaks are one of the main benefits of investing in superannuation but the price you pay is losing access to your money. The government is prepared to give tax concessions on superannuation. Their hope is that the money lost by giving these concessions will be offset by the money saved in not having to pay you a full pension when you retire.

* Due to the coronavirus epidemic, people suffering financial hardship were allowed special withdrawals of up to $10,000 a year for the years ending 30 June 2020 and 30 June 2021. At the time I commented it was an unwise thing for fund members to do because of the massive negative effect on the end benefit.

The way it used to be Today in Australia almost every employee is a member of a superannuation scheme. But it was not always like that. Until the early 1980s superannuation tended to be restricted to white-collar male career workers such as public servants and bank officers. In those days few women worked after marriage and most men stayed in one job for life. After working at the same job for a year or two, an employee might be invited to join the company’s superannuation scheme to which the employer contributed a percentage of the employee’s salary. Usually the employee contributed something as well. The money was placed in government bonds, blue chip shares, and fixed interest securities with the aim of providing a fund for the employee’s retirement. Problems arose when people started changing jobs after only a few years’ service. Usually the only money they got back from their superannuation fund was a refund of their contributions plus 4% per annum interest. In most cases the amount was so small that the employees promptly frittered it away on something like a holiday. Accordingly, the small amount of superannuation they had accumulated to that date had gone and did nothing to help towards providing a secure retirement. The tax benefits granted by the government were wasted! The other problem with superannuation then was that many aggressive tax planners used it as a tax rort and established superannuation schemes that were designed to minimise tax rather than provide benefits to employees. Typically, the 14

The way it used to be

employer, usually a small business, would make a large tax deductible contribution to his own superannuation fund and then lend the money back to the business at a tiny rate of interest. The fund suffered and in many cases was unable to pay adequate retirement benefits.