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Super changes: Too good to be true
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Super changes: Too good to be true

It seems our national trait of being sceptical of our political masters is alive and well.

The changes to simplify our superannuation regime have roundly been welcomed by industry, consumers and media commentators. But public confidence that changes to super that include such headline grabbers as a zero tax rate on retirement benefits will be permanent is less than 30% according to recent research done by Association of Superannuation Funds of Australia (ASFA).

Politicians like Federal Treasurer Peter Costello must scratch their heads and wonder what more they can do: you abolish taxes on super payouts and 65% of people do not believe the changes will stick.

Perhaps it is a case of this being almost too good to be true. According to the research done by ANOP research services that covered 750 working Australians aged between 25 and 69 and builds on other research work that was started in 2001 most people - 65% - think the changes are a good idea while 31% felt they didn't know enough to answer.

So overwhelmingly people who are aware of the impact of the changes are reacting positively - they are just sceptical it will be sustainable.

The research also highlighted some key areas where our attitudes to super will have to change if we are to maximise the value of what super will offer - assuming of course that the changes become law broadly in line with what was announced back in May.

For a start the pattern of contributions needs to change. The new rules are deliberately skewed against a big ramp up of contributions as people near retirement age. The limits on undeducted contributions from July 1 next year of $150,000 a year will see to that.

Yet the ANOP researchers found that 56% of people believe they will increase super contributions closer to retirement. Interestingly 60% of people aged in the 25-39 and 40-49 age brackets saw that as their contribution pattern while only 45% of people in the 50-69 age bracket thought they would be increasing contributions the closer they got to retirement. Perhaps the older we get the more realistic we get.

The reasons people gave for increasing contributions closer to retirement are both pragmatic and revealing. Common responses included can't afford it now, a mortgage to pay off, children still at home and a general notion that the sense of urgency about saving for retirement will build the closer you get to retirement age.

All of which are valid responses. But one of the accepted wisdoms that some financial planners are questioning now is the old idea about paying off the mortgage first then build up super. An alternative strategy - which requires some serious number crunching on an individual level to work out whether the strategy would work - is to pay off the basic mortgage payments and put all available savings into super.

The concept is simple: put your money to work in a tax sheltered environment and when you retire take out a lump sum tax free to pay off the remaining mortgage debt. The simple effect of compounding returns by having more of your money invested rather than paying tax away explains the appeal of a strategy like this.

A major concern from the research was the lack of engagement from younger people. On an unprompted basis only 11% of people aged between 25 and 39 were aware of the recent changes compared to 33% of people between 50 and 69.

The adequacy of retirement savings is an issue that people are clearly recognising with 68% of people saying the 9% mandatory contribution will not be enough. Indeed 72% of people in the youngest age group - 25 to 39 years old - said they need to contribute more than 9%.

How much is enough? Well 12% and 15% were the most popular contribution levels among the survey respondents.

Finally the research underscored the fact that not many people were exercising their ability to switch funds while the overall satisfaction levels with funds - be they industry, retail or public sector - was 87% to 90%.

Politicians lust after those sort of approval ratings. But they have not had the benefit of three strong years of 20+% sharemarket returns.

Super fund trustees and managers would be well advised to apply a healthy dose of scepticism to those approval ratings.

Smart Investing
By Robin Bowerman
8 September 2006

Principal & Head of Retail, Vanguard Investments Australia