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A super exemption

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There’s been a few economic ideas passed around lately. But the one that most intrigues me is the exempting of low income workers from the superannuation guarantee.

The current super system requires employers to inject 9.5 per cent of a worker’s wages into a superannuation fund, which can only be accessed at retirement age.

Under the proposal made to the government, low income earners could opt out of the super guarantee contribution and instead take their super as cash. So a part-time worker on $35,000 would be paid an extra $3,300 per year which is around $63 a week.

The argument for allowing people to opt out of super is that it puts more cash into their household to pay for immediate needs.

Or, if you can take your super as cash, you can buy a house, which certainly guarantees housing security.

So far, so good. But I have another way of looking at this.

The thinking behind this idea assumes you want to rely on the age pension and not have any super of your own.

But just because you’re on a low income – or casual and part time employment – doesn’t mean you don’t want or need savings in retirement. Low income earners need it just as much as high income earners.

Luckily, you can ignore this opt-out idea and think about how to make super work for you and ensure you have private savings in retirement.

You may not think your compulsory contributions will amount to much, but find an online super calculator and see for yourself: If you start work at 18 earning $35,000, and retire at 65, with your savings invested in balanced funds, you’d end up with $342,000.[1] That’s just receiving the super guarantee – you can also make your own contributions on top.

So regardless of your income, I urge you to see superannuation as an economic advantage, not a burden.

One advantage is the tax arrangements you enjoy in super: your contributions are taxed at 15% (minimum marginal tax rate above threshold of $18,200 is 19%), your earnings in super are taxed at 15% and the retirement draw-down of the nest-egg can be tax free.

There may be circumstances where taking this money, under proposed changes, to reduce high interest credit card debt, could be a better short term strategy than contributing to super. It depends on your personal circumstances. However, keep in mind that this also assumes you wouldn’t run up more debt and you would find other means to save. Overwhelming evidence tells us this isn’t likely.

So you can build a healthy balance without taxes eating too much from it, and enjoy your savings without income tax.

There’s no better investment – not even your home, which is paid with after-tax income.

The government will also make co-contributions with you if you’re a low income earner and put in your own money.

Another advantage of super is the compound effect, where modest regular contributions, over many years, grows your nest egg to substantial balances.

So if you don’t take $63 a week as retirement savings – and keep it as cash – what else would you do with it? Will it compound, as it does in a super fund?

Remember that the super system works for all income levels to fund retirement. Regardless of your income, you get contributions from the employer, you receive tax advantages and you get compound effect over many years. You need to be patient, as your money is preserved until at least 55.

Super can be highly effective, but you have to be in!

 

[1] http://www.superguru.com.au:8081/ASFARetirementCalculator/ui/index.html