Want to avoid being at the mercy of the government’s superannuation regulations?
2014 saw some dramatic changes suggested for Australia’s retirement landscape, with the Abbott government looking to extend the age pension eligibility age out to seventy by the year 2035, with six month increases every two years from 2025 (the retirement age was already set to increase from sixty-five to sixty-seven between now and 2023). While this change doesn’t automatically mean the superannuation preservation age will increase, historically, super preservation is around ten years before pension eligibility for most people. So there is a possibility that by 2035, you may not be able to access your super until you turn sixty.
This change caused widespread concern when it was first announced, with workers understandably fearing that they face a future where they’ll be working until they turn seventy. But that doesn’t have to be the case. With a good financial strategy and a reasonable income over the course of your career, you should be able to retire on your own terms.
While superannuation income is taxed at the low rate of 15% (which could save you up to 30% on the top income tax rate of 45%) the restricted access prior to reaching your superannuation preservation age can be problematic if you plan to retire early.
So, how can you avoid relying on a government agenda (either now or in the future)? An over-reliance on any single investment can put your entire investment strategy at risk, and this applies to superannuation just as much as anything else. By adding investments such as shares, property and term deposits, you can still earn reasonable returns, in some cases benefit from capital growth, and in all events avoid the limitations of the superannuation preservation age.
Shares can be volatile, depending on the market, but they have the benefit of normally paying regular dividends, usually at higher returns than you will achieve through term deposits, plus they have the added benefit of capital growth with the potential for future sale if you need additional funds. The benefit of shares over property in this case is their ability to be sold in small parcels, rather than the all-or-nothing choice with any given property. Property also has the disadvantage of a longer sale time before settlement, which can be a major concern when a short-term cash deficit is the problem.
Like shares, the property market is susceptible to fluctuations, which can be an issue if you need to sell during a down cycle. Changes in interest rates can also provide a challenge. If you have undertaken the largest loan you can afford and interest rates increase marginally, you may find yourself falling behind on repayments or even be forced to sell. Benefits of an investment property include the likelihood of capital growth over an extended period, and if you are in a high income tax bracket, negatively gearing the property will reduce your tax in the short-term while leaving you with a valuable asset in the future. You can also claim the associated expenses such as maintenance and management costs as well as depreciation against the rental income you earn. If you have lived in the home for a period of time, you can also claim it as you primary residence for up to six years, avoiding capital gains tax if you sell during that time.
While shares and property are both susceptible to market fluctuations, term deposits provide a more secure investment, as you are certain to retain the principle as well as the agreed interest from the bank. Like most investments, the potential returns are in line with the level of risk, and term deposits are no different, usually offering significantly lower returns than other investments. While shares and property both offer the potential for capital growth as well as returns from dividends or rental returns, your term deposit offers only interest returns, with the principle remaining unchanged over time.
There are other investment opportunities, which are less common but also effective, so it is worth having a chat with your financial adviser before finalising your strategy. The main thing to remember is that by investing beyond your superannuation fund, you are giving yourself the freedom to access at least some of your funds when you want to, and not when the government says you can.
By Troy MacMillan