Australia’s major super funds recently notched up their fifth straight month of positive returns. It’s good news for all Australians as any rise in super values means we’re likely to have more money in retirement.
For the 12 months ended January 2011, ‘balanced’ super funds recorded gains of almost 8%. This type of fund offers exposure to a wide variety of assets, usually with around 70% of the fund’s assets held in shares.
Shares have historically provided healthy long term growth, and so are an ideal investment for investments like super. The downside is that many balanced funds have experienced a rollercoaster ride in recent years reflecting the highs and lows of sharemarket movements.
SuperRatings gives the example of a hypothetical investor with $100,000 in a balanced super fund in February 2006. By October 2007 the nest egg would have risen in value to about $122,405.
But within less than two years – by February 2009, that same fund would have plunged to $91,770 thanks to the ravaging effects of the global financial crisis and subsequent sharemarket falls. The good news is that the same hypothetical fund would be worth around $116,138 today – not too far off its pre-GFC level.
With super fund returns heading back into the black, now is a good time to build your nest egg with some extra contributions.
There are good reasons to add to your super rather than relying solely on your employer’s contributions. These days we face strict limits on the amount of pre-tax contributions we can make – up to $25,000 annually for those aged under 50, or up to $50,000 each year until July 2012 if you are aged 50-plus.
Limits also apply to the amount we can add to super from our own pocket. These are known as ‘after-tax’ contributions that you don’t claim a tax deduction for, and they’re capped at $150,000 annually or $450,000 over three years.
For many working Australians the prospect of adding this much to your super in any given year may be financially unrealistic.
Nonetheless, a popular strategy in the past was to sell up other assets and tip the cash into super in the lead up to retirement. This strategy is being discouraged through the annual contribution caps, and the bottom line is that we need to take a ‘sure but steady’ approach to building our nest egg.
Thankfully there are some simple ways to add to your super on a regular basis. You could ask your employer about making salary sacrifice contributions. These involve having part of your pre-tax income paid into your super fund instead of taking the money as cash in hand. It’s a very tax-friendly way to make additional contributions.
If you’re a low to middle income earner the super co-contributions scheme is worth a look. Under the scheme, if you make a super contribution from your own pocket – and your annual income is below $61,920 annually, you may be eligible for a top-up payment from the federal government.
Or, if your partner is a low income earner, contributing up to $3,000 to their fund could see you claim a tax rebate worth a maximum of $540.
So, what’s the message? Super is good.