The following is a guest post by Lloyd Harris of Ord Minnett (Gold Coast).
By taking a few simple steps, people are able to secure a more comfortable retirement for themselves and their loved ones.
Let’s take a look at a few basic strategies which can improve your outcomes through time.
For someone on the top rate of tax, they will pay a marginal rate of 47% tax, plus a Medicare Levy of 2%, and if they don’t have the appropriate private health cover, a Medicare Levy Surcharge on top of this at another 1.5%. That’s a total marginal tax rate of more than 50%!
However, there is relief to be found in a number of strategies, including Salary Sacrifice, or for those people who are self-employed, personal deductible contributions. This strategy involves redirecting some of your income, before paying tax on it, into your superannuation fund.
Let’s use an example of a higher income earner, Bob Smith the IT Manager.
Bob currently has only the standard Super Guarantee Contributions (SGC) being made into his super fund. He pays $67,947 in tax each year. Bob decides to commence a salary sacrifice arrangement.
By increasing the total super contributions to $35,000 per year, Bob reduces his take home income by $8,160 per year, but will save $5,440 in tax while boosting his super by $13,600!
This strategy can actually be valuable for anyone earning money (and paying tax), even if you earn a lower wage.
For people with an SMSF, This strategy can be taken a step further by using franking credits from investments in Australian companies within your superannuation to reduce (and even eliminate) the amount of tax your fund is required to pay forward to the ATO.
It’s important to be careful though, because there are limits on how much you can contribute to super depending on your age, so it’s important to seek advice.
Reduce your fees
While all superannuation accounts have fees, it is the range of fees, and also what you get for your money, that varies significantly across the industry.
Basic industry style superannuation accounts may be a very cheap option, generally costing less than 1% pa, but cheap isn’t always best – depending on what you want from your fund. On the other end of the spectrum, retail superannuation accounts can cost up to three times this amount after taking into account administration, investment and financial planner fees.
Comparing two super funds through time, with all assumptions held the same but with fees in one account at 3% versus 1%, and the difference is significant at close to $500,000 over 30 years.
There is a happy medium to be found, and it comes back to understanding what you are paying for, and whether this is giving you what you require from a super fund.
If you want the ability to trade direct equities in your super fund, and to work closely with an investment manager, then perhaps there is good value to be found in paying slightly higher fees than found in an industry fund.
Get advice (without getting ‘sold’):
Unfortunately, good financial advice seems often to get lost somewhere into a sales pitch, making it hard for consumers to really know whether they are really getting the best advice, or whether they are just being ‘sold’ a product.
If an adviser recommends you rollover your money into their product, be sure to receive a clear, logical explanation as to why it is in your best interests. If they can’t provide that to you, it might be worth reconsidering.
Despite the negative press the industry gets, there are a number of excellent advisers available. Speak with a few before making any decisions, and go with your gut. It’s often the best way to go.
Lloyd Harris is a Private Client Adviser with Ord Minnett Private Wealth, one of Australian’s most trusted brands in financial and investment advice.
Private Client Adviser at Ord Minnett Private Wealth (Gold Coast)
Phone: 07 5557 3309