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Written by Ivan Fletcher – Senior Adviser
It looks as though the Superannuation Guarantee (SG) is finally going to go to 12% (by 2025 that is).
I say finally because this change was legislated several years ago, but then “frozen” for the last 7 years, some would say unfortunately so. Until now that is, with the 9.5% set to rise to 10% from next financial year (21/22).
It’s my opinion that this change needs to happen, although I also empathise with a struggling small business that, in the short term at least, may be wondering how they can withstand any increases to their expenses in the current economic climate. The “big questions” are whether or not pensioners have enough to fund their own (comfortable) retirement and whether or not the Government’s financial obligations are becoming too large. You then need to take into account the baby boomers hitting retirement and also rising life expectancy, both of which will add to the financial burden on the Government.
If you go back to the 91/92 financial year when the SG was introduced, the Government was spending 1.2% of GDP on age pension payments. Jump to the 18/19 financial year, and despite there now being over $3 trillion inside the Super arena, this figure has now more than doubled to 2.6% of GDP.
If something isn’t done, one would imagine that this will continue to rise and increasing the SG will obviously help reverse this trend.
Let’s face it, SG is basically big brother legislating a “forced savings plan” for some that would otherwise spend all their earnings throughout their working life and not plan for retirement. The fact is though that the SG has been around for nearly 30 years and most people hitting retirement still don’t have enough to retire on.
The icing on the cake to increasing the SG, given the funds are generally invested when contributed into Super, is that they should benefit from compounding in the long-term.
Example – Let’s assume a 30 year old earns $60,000 p/a and that they’ll retire in 35 years at age 65. For simplicity let’s assume that their pay rises exactly match the rate of inflation, i.e. we will apply no increase in wage. Based on a conservative 7% p/a return on their investments, the difference is as follows: a 9.5% p/a SG results in a Super balance of around $788,000. A 12.5% SG however results in a Super balance of approximately $995,000.
There are many pundits out there making a case that the SG should in fact go up to the likes of 15% p/a. At that level in the example above the $995,000 becomes a whopping $1.24million.
As I stated above, I can empathise with small businesses that may struggle with any rise to the SG, especially now and especially in certain sectors. Given that the Government is the driver of the SG and an eventual beneficiary of it, I wonder whether they could/should implement a plan to at least partially compensate businesses to enable the viability of the SG increase.
Whatever the Government chooses to do, now or in the future, you can take control of your own retirement planning. You could always opt to contribute over and above the SG, and you might set a plan to gradually increase this amount as you approach retirement. Additional contributions into your 50s and beyond are an incredibly tax-effective way to enable your Superannuation balance to create the income you want in retirement. They might be conveniently timed with kids moving out (reducing expenses) and/or with the home loan being paid out. The advice can also be invaluable, especially leading up to retirement. An adviser can help you keep on track to maximise your contributions to Super, combined with effectively investing the Super balance. If you would like to consider joining the hundreds of members whereby Hudson currently manage their Supers, please book a call to discuss on 1800 804 296.