What exactly is superannuation?

I don’t know how many times I have had people say to me “Superannuation is a lousy investment” or “I don’t believe in Superannuation”. Statements like these come about because the person making them doesn’t really understand what superannuation is.
Simply put superannuation is not an investment at all, much less a lousy one, it is simply a tax advantaged vehicle for accumulating wealth. The government provides taxation concessions in respect of contributions to and income earned by superannuation funds, as an incentive to encourage people to set aside funds for their retirement. The hope is that if people are sufficiently encouraged to make provision for their own retirement, the government won’t have to.

Without going into all of the detail (and there is plenty), the following are some of the incentives provided by the government
– allowing a tax deduction for employers setting money aside into super for their employees,
– allowing a tax deduction for self employed people setting aside money into superannuation,
– providing a lower rate of tax on the earnings on investments in the superannuation environment than most ordinary taxpayers would pay on those same earnings outside of superannuation
– providing even lower tax rates on funds held in superannuation which are funding a pension.

So let’s say that I could offer you the opportunity to transfer money from one bank account to another and get a tax deduction for it. Let’s say that once it’s in this new bank account, you will pay a lower rate of tax on the interest than you would on the old one. Let’s say you would pay no tax at all on the interest if you are making a regular withdrawal from the account once you’ve retired. Does that sound like a good deal? Does that sound like a lousy investment?

The point is that there is no such thing as lousy superannuation, but there are such things as lousy investments. How your superannuation is invested, how well it is managed, the level of and structure of contributions you make will all have an impact on the final outcome, but at its heart, superannuation is a tax advantaged structure that operates just as outlined above.

There are of course rules and limitations around what you can do with your money once it’s in superannuation, and this is the bit that gets many people steamed up. “How could the government stop me from doing stuff with my super” they say, “They keep changing the rules” they say, “I can’t touch my money” they say. Once we understand what superannuation is, why the government provides incentives, and how they are trying to manage our behaviour, we can overcome these objections.

Every financial decision we make involves a trade-off. Usually we are giving up one thing for a more desirable other thing. In the case of superannuation we are giving up access to and complete freedom of use of our funds today, for a better outcome tomorrow because of the government incentives to do so.

We may choose to invest our superannuation funds in any number of ways which will either provide us with a greater or lesser outcome, but it is not the superannuation itself that is the determinant of that outcome. We could make the same investment choice outside of superannuation and get the same positive or negative result, but for many people, the only investment exposure they have is via their superannuation. Unless the investor is an expert himself, the same rules should apply whether talking about investment inside or outside of superannuation. If the investor would not make an investment choice outside super without advice, why would they do so with their super?

So please don’t tell me superannuation is a lousy investment. It remains the single best tax haven for our retirement savings, and when used properly significantly enhances the wealth creation opportunities we have. To be sure there are rules, and you need to know what they are, or seek advice from someone who does, but superannuation is not something you should be afraid of. Share this message with your friends if you want to help them sleep at night.