Add some spice to your super nest egg

Anthony Keane

Let’s be honest. For most Australians, superannuation has about as much sex appeal as a brick.

It’s seen as complex, confusing, the rules are constantly changing, and you can’t touch it until you retire.

But there are ways to spice up your super and benefits that are definitely not dull.

Financial strategist Theo Marinis says super can be an attractive reward for a life’s work and deliver huge tax savings.

“What makes it super-sexy for me is what it really buys you dignity in your old age,” Marinis says.

“I find the thought of living on the single pension of $17,469 per annum or $672 per fortnight distinctly unexciting.

“However, if you have saved an extra $200,000 in super, you can easily increase your fortnightly income from both Centrelink and your own funds, earning a conservative 5 per cent a year on your super, to around $1000 per fortnight or $26,000 per annum and you can still have much of your super nest egg intact.”

Tax? What tax?
“It is important to remember that superannuation represents a highly tax-effective structure for investment,” Marinis says.

“During the global financial crisis investments were affected, but the tax-effectiveness of superannuation remained.”

These benefits include salary sacrifice, where income paid into super is only taxed at 15 per cent rather than the marginal tax rate of up to 46.5 per cent.

Income earned by money sitting in super is taxed at just 15 per cent, rather than marginal rates and capital gains are taxed at just 10 per cent.

Many people particularly the self-employed can claim tax deductions for pumping their money into super.

It gets better when you reach age 60 and switch to the pension phase, where your super starts paying you an allocated pension now known as an account-based pension. During this phase there is zero tax on income and capital gains.

This means that somebody who sets up a self-managed super fund and uses it to buy a $400,000 investment property will, after turning 60 and switching to the super pension phase, pay no tax on the sale of that property.

If, however, the property was held outside of super, assuming it doubled in value before being sold, half the $400,000 capital gain would be added to their taxable income in the financial year it was sold.
Ord Minnett adviser Nick Ross says many people do not understand these tax benefits.

“As long as you’re 60 and are in the pension phase, it’s tax-free,” he says.

“And you can get a franking credits rebate for shares.”

Dividends paid to super funds in the pension phase come with the bonus of a tax refund of the 30 per cent corporate tax rate paid by the company.

Spice it up
About 90 per cent of Australians leave their super in their fund’s default option, typically a balanced fund holding Australian and international shares, bonds, property, cash and perhaps some infrastructure.
It’s a mix that suits many people, but many others are ignoring the opportunity to spice up the investments they own within super.

Super funds can hold just about any asset, but there are strict rules saying the assets cannot be for personal use.

Australian Stock Report head of research Steven Dooley says emerging markets are an area to watch in 2010 and can be invested in via managed funds or exchange-traded funds listed on the stock exchange.

“Emerging markets are looking quite hot because markets like China and India have been able to ride out the global financial crisis much better than the developed countries,” he says.

“The appeal for these economies is high GDP growth, and it is likely that they will outperform developed countries in 2010.”

Dooley also likes small-cap stocks: “Given that the twin engines of the Australian markets financials and resources face an uncertain 2010, investors could do well by targeting some of those smaller gems,” he says. “Of course, never buy a stock just because it’s small or because of a dinner party tip . . . do your research and seek advice if necessary.”

Other people’s money
PKF partner Tony Simmons says gearing or borrowing to invest is a good way to increase long-term investment returns.

It’s more common among self-managed super funds, but many retail funds offer geared share funds where borrowed money is added to investors’ money.

“I think people should be thinking a bit more about gearing,” Simmons says.

“There’s a lot more knowledge about it now and the banks are across it better. There’s a lot of fund managers that do geared portfolios . . . but you have to be careful because they can magnify the losses and magnify the gains.”

“Super is one of those things where people try to be as conservative as possible but if you work the risk out and think it through, maybe gearing is something to consider.”

Business boost
A growing trend among the self-employed has been to put their business real estate into their self-managed super fund.

Macquarie Private Wealth associate director Michael Errey says this can be one of the best ways to add spice to a super portfolio.

“When you own your own business real property you can save on tax; you also maintain control and can be your own landlord,” Errey says.

As well as reduced tax while saving for retirement, there is also the nice prospect of no capital gains tax if the business premises is sold when the fund is in the pension phase.
Government handout.

Few investments are guaranteed to double your money every year, but the Federal Government’s co-contribution scheme for low and middle-income earners can do just that.

“These rules mean that a person earning under $30,000 per annum who contributes an extra $1000 to their super fund will find that the Government will match it,” Marinis says.

“This payment could be made on their behalf, maybe by a family member who has greater disposable income.”

THINK OUTSIDE THE SQUARE
* Super funds must always be invested with a view to providing for a member’s retirement.
* However, it doesn’t mean you can’t be creative, but experts say any unusual investments should only be a small part of your portfolio.
* Always remember to seek professional advice, particularly with self-managed super funds (SMSFs).

ART
Artworks can be owned by a SMSF, but you are not allowed to hang them on the wall at home.

They can be lent to a gallery or rented to a business or art bank.

YOUR FAVOURITE COMPANY
Whether it’s Woolworths, JB Hi-Fi, Coca-Cola Amatil or any of the thousands of others listed on the stock exchange, they can be owned directly through shares via SMSFs or some retail super funds.

Many funds offer ethical investment funds that avoid things such as tobacco and gambling stocks.

WINE
Wine is like art. Your SMSF can own it but you can’t drink it and it must be stored in a commercial, arms-length way.

BUSINESS AND PROPERTY
Your own business can receive some money but generally a SMSF can only invest 5 per cent of fund assets in investments involving related parties.

Owning your business premises is a much easier option. SMSFs can own a member’s business real property, or even a farm, but rules apply

THEME PARKS
Theme parks and bowling alleys can be owned if you invest in shares in the listed Ardent Leisure Group, formerly Macquarie Leisure Trust, through your retail super fund or SMSF.

Ardent’s assets include Dreamworld and Whitewater World on the Gold Coast and AMF and Kingpin bowling alleys.

ASIAN FUNDS
Asian share funds are offered by many super providers and give investors exposure to the world’s growth engine of the next century.

CARS
Classic cars are similar to art and wine. While they can appreciate in value dramatically, you’re not allowed to drive them. However, your SMSF can loan it to a museum.

GOLD
Gold bullion is popular among investors at the moment. SMSFs can invest directly in gold bars or coins through the Perth Mint or listed securities on the stock exchange that track the precious metal’s pr