Super Contribution Strategies

As of July 1st this year, the government rolled out the first of many incremental increases to Australian’s compulsory superannuation entitlements, with employers now required to contribute 9.25% of salary. Over the next 7 years, this policy will culminate with employees receiving a minimum 12% of salary in superannuation guarantee by 2019. Although this is certainly a positive step towards future retirees enjoying a self-funded retirement, it is important to consider the advantages of contributing additional income to super and the significant effect this can have on your balance at retirement. This week L J Financial looks at Contributions Strategies and how saving over the long term can help you achieve the lifestyle you deserve in retirement. 


Superannuation Guarantee has, since its birth in 1992, been the ‘teenager’ of the finance world. It’s often complicated, misunderstood and ever-changing, but although it’s a drain on your disposable income at the moment, it’s yours, and with some attention and care this long-term investment will eventually pay back the many thousands of dollars you have invested over your working life.
This is obviously quite a tongue in cheek description of the superannuation industry, but the fundamental concept of investing now to provide later certainly holds true.

Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t, pays it.” Despite an understanding, unfortunately the majority of Australians will at some stage of their lives be required to pay it, whether it is via a home mortgage, credit card or personal loan debt. However once these debts have been extinguished and investors have progressed to the ‘saving’ stage of their investment lifecycle, there is no better vehicle through which to accumulate wealth than superannuation. This is where not only compound interest but the numerous tax concessions within superannuation can be of great advantage to investors over the long term. Should cash flow allow, contributing additional funds to superannuation can have a significant effect on your final balance when it comes time to leave the workforce.

For example, a 40 year old employee with a salary of $100,000 will as of 1 July 2019, contribute $12,000 before tax to superannuation. Assuming their salary increases only with inflation moving forward, a superannuation balance of $200,000 and conservative average growth of 5%, they could expect a future superannuation balance at age 65 of approximately $650,000.
If the same employee were to increase their pre-tax contributions to superannuation through a “salary sacrifice” strategy to say $20,000 per annum, their balance at retirement would be more in the vicinity of $1.1 million. Obviously this does not take into consideration potential market movements, fees and taxes etc. but what this illustrates is the potentially dramatic effect this could have on the comfort and lifestyle of your retirement.

Strategies such as this become even more attractive at preservation age (find your preservation age here) where you can supplement the income you sacrifice to super with pension payments that are not only tax effective in your personal name, but result in a virtually tax free environment for the pension portion of your superannuation. This strategy is called a Transition to Retirement or TTR. In layman’s terms, you will receive the same take home pay, and once you commence a pension any capital growth and income derived from your superannuation balance is completely tax free.

Like our teenager from earlier, these strategies may seem complex on the surface and not worth dealing with… After all you’ve just come home from a hard day’s work and the rigmarole of attempting to engage is just not worth the trouble.

Teenagers are one thing, but in terms of your personal finances, this is where the advantage of professional advice can ensure you utilise your superannuation in a way most appropriate to your personal situation. With the turn of the financial year just behind us, now is a pertinent time to speak to a financial adviser and engage in an investment that will over the next few years become 12% of your income and in the future likely be your main source of funds for retirement.




Charles Green
Corporate Adviser

FOFA

The Future of Financial Advice (FOFA), is your advice provider compliant & what does these changes mean for the average Australian?



Many may not be aware, but as of the 1st of July 2013 the largest reforms associated with the financial planning and advice industry are now mandatory. LJ Financial discusses what constitutes a compliant organisation and how the changes impact both existing clients and those considering financial advice for the first time.

On the 1st of July 2013 the reforms in relation to the Future of Financial Advice were made mandatory. The major changes include the best interests duty, opt-in and fee disclosure reforms, a ban on conflicted remuneration, a ban on soft dollar benefits and changes around scaled advice.

Best Interests Duty
For the client, this essentially means that the adviser must act in their best interests and not for themselves or the company that they work for. Financial advisers must establish that they have acted in the best interests of the client by ensuring that appropriate steps have been taken before any advice is given. For the adviser it comes down to the notion of "reasonableness"  meaning that the adviser has undertaken a "reasonable investigation" when recommending particular products or specific advice.

Opt –In & Fee Disclosure
This is in relation to new clients that sign on to ongoing advice and is probably the most positive reform when it comes to the financial services industry. This is a requirement that all advisers must request their clients that are paying on-going fees must opt-in, or re-new, their agreement every 2 years. In addition the advisers must provide the clients, as a minimum, a statement outlining all the fees they have been paying in the previous 12 months.

Ban on Conflicted Remuneration & Soft-Dollar Benefits
Licensees & authorised representatives will not be allowed to receive or be entitled to receive payments or non-monetary benefits if it influences the recommended product. In real terms, it means that the adviser must recommend products based on the suitability for the client not on the remuneration received.  The restrictions on soft dollar benefits include a ban on non-monetary benefits that are given to advisers if they recommend certain products to clients. This is particularly relevant to those companies that are either directly licenced or indirectly incentivised by larger companies to recommend certain products as they will banned from this practice as it falls under conflicted remuneration.

Scaled Advice
The Government is now allowing scaled advice to be provided by advisers both inside and outside of superannuation. In real terms a client may request advice on a certain part of their finances without taking into account any other part of their financial situation. An example of this would be a review and advice around a client’s superannuation and insurance, without providing advice around their personal financial situation.
LJ Financial applauds these changes as more transparency and greater focus on the clients is always a fantastic change for the industry. These reforms will hold advisers more accountable for the advice given and will give the individual both more control and more involvement in their personal financial situation. Also it will reassure the client that the advice is appropriate for their circumstances with no ulterior motive around the product and advice given.

Finally as an individual either receiving or looking to get some financial advice around their finances be sure that your adviser is FOFA compliant and it is also a great opportunity to review the fees you’re paying and ensure the advice is suitable for your circumstances.






Duncan Brown
Private Wealth Adviser