Budget 2006: Property & Shares vs Super - which one is now better?

[MPmelb]

The following extract is from Robert Gottliebsen's article in today's "Australian" about the changes to Super in Budget 2006:

"The changes are welcome and long overdue, but they create winners and losers. Those who plan to retire before July 1, 2007, and/or before they reach 60 will need an urgent revision of their strategies.

At present, money invested in superannuation is taxed 15 per cent on the way in and 15 per cent on the earnings of the fund.

When it is finally paid to retirees, the superannuation money is subject to complex, myriad taxes.

Under the new plan, all superannuation payments for those who retire after they reach 60 - whether they be lump sum or pension - will be tax free.

Those now receiving money from funded superannuation plans will receive the same tax exemption. If a person retires before 60, a slightly modified version of the current myriad taxes will remain.

But some younger people may conclude that it is better to invest $50,000 a year in superannuation and rent rather than buy a dwelling. Those who negatively gear instead of going for superannuation will need to reassess their strategies"

The full article is available on http://www.theaustralian.news.com.au/story/0,20867,19085273-601,00.html

Based on the alterations and tax advantages to Super announced in this budget, is Gottleibsen correct in the last paragraph when he says that it would be better (for young people) to invest $50K pa in Super instead of directly investing in shares or property?

Especially since the lump sum is tax free at the age of 60.

For example, even if you contributed $15,000 into Super per year for 30 years, at a return of 6% pa compounding, this is roughly $1 million at retirement at 60 (even when 15% is taxed on inputs).

In contrast, $1 million worth of property and/or shares will be subject to CGT on 50%. And there's a lot more planning, effort and financial intelligence involved through the years with these.

So now what is the optimum strategy for retirement?

 

[alexlee]

My issues with super haven't changed: you still have to wait until 60 before you can access the money. For younger investors, if you start young you should be able to retire before 60, so super may not be a good choice. Of course, this is not advice but personally, I'm avoiding super as I always have.

I can see how this can be very beneficial to those who are nearing 60, though.
Alex

 

[gekko_99]

I might be a bit pessimistic but for me at a bit over 30 years from getting my super I don't like the money being out of my control for that long. My concern would be if the rules were to change between now and then so I put in the minimal amount.

The main thought is that with me in charge of it I can invest it more aggressively or cash it all in or stick under my bed if I want. If I get it right I might be able to retire by 50 which is better than 65.

 

[Goldminer]

Super is all eggs in 1 basket

If your fund collapses just cant see any government refunding investers.
Have seen some articles recently saying that due to the huge amount of money going into super its pushed the value of many shares to a piont that they are valued way more than what there worth. My gut feeling is there maybe some huge loss of funds just around the corner.

 

[buzzlightyear]

Where's the leverage?

No ability to leverage your super investments is one distinct disadvantage

 

[Simon]

All those points aside - Super is now hugely better choice than it was.

May not afect property too much but should see an increase in demand for blue chip shares that are a mainstay of a balanced share fund which is where most super is...

What do you think?

 

[XBenX]

Im sure there was quite a few happy phone calls amoung some ready to retire as well as a few questions from the boomers (should I wait another 5years in order to get my super tax free etc)

Meanwhile the govt is enjoying the extra 5yrs of labour force participation and of course votes they just bought.

Im with Alexlee - super is and always has been an effective vehicle for accumulation of assets prior to reaching retirement age. The problem for most of us young workers is we dont want to wait around that long.

I view my investments in 3 ways, and whilst it is probably different to most of the population I dont think it is all that different to many here.

1/. Pay for today, tomorrow and short term (my lifestyle and hobbies are expensive)
2/. Pay for retirement till 60
3/. Fund my retirement post 60

This budget hasnt really meant any major change in my strategy, I never planned to have an excessive component. What it has meant is that I need 15% less in post 60 retirement assets and that will now be pushed into number 2.

So sure it saves most people 15% on exit (those with excessive benefits, etc more) but how much of an incentive that is for each person really depends on their circumstances.

 

[FatBoy]

My issues with super haven't changed: you still have to wait until 60 before you can access the money. For younger investors, if you start young you should be able to retire before 60, so super may not be a good choice. Of course, this is not advice but personally, I'm avoiding super as I always have.

Spot on. That's pretty much exactly what i would have posted as well, thanks for saving me the effort !!

 

[MPmelb]

If you really think about it, 60 years is not old these days.

For some people in their 30's who are not financially astute enough (generally the majority) to directly invest in shares or property, now Super will be the easiest way for them to enjoy a good retirement as a result of the changes.

In fact, as per my previous post, Super (self managed for best returns) may now be a very good investment option full stop for everybody. Imagine getting 0% tax upon exit! It sure beats CGT.

The question that investors now have to ask is whether they will be better off in direct shares v direct property v super. If they think they can get better NET (after tax) returns with shares and property against super, then that will be their strategy. But the majority of people will not be able to get better returns. And we would all like to retire young if possible, but how many really are in that position before the age of 60? Not many I guess.

And with the influx of money into Super that will now occur, it will likely underpin the strength of the sharemarket. Will that mean there will be less money invested in IP? Perhaps. And with the reduction in tax scales, this reduces negative gearing as a tax saving optiion. Which will also affect IP's.

The investment landscape has now significantly changed, and many will need to reaccess their strategies.

 

[D.T.]

Hi

Super (self managed for best returns) may now be a very good investment option full stop for everybody. Imagine getting 0% tax upon exit! It sure beats CGT.

20k to invest
A: Super... no leverage, 10% returns a year = 2k. 2k exit since no tax?
B: Property... leverage to 100k, 10% returns a year = 10k. 5k exit after tax?

Extremely oversimplified, but just proving a point

 

[Pete]

No superannuation for me

Investment returns from property are light years ahead of superannuation. Even if I was paid to put money into superannuation I wouldn't!

 

[our obsession]

Sssuper vs Property?

In my opinion, (and it can be a tad deviant)
Super is so like having Pap Smears, necessary but no fun...

Property is a lot of fun, it is like sex, so many variants and different challenges with varying outcomes...and if you do it right, with good protection(s) you stand a good chance of coming out on top..

Property wins hands down for me...but with a begrudgingly (and healthy) respect for Super.

 

[Ol School Skata]

No ability to leverage your super investments is one distinct disadvantage

Not True - super fund could buy installment warrants (internal gearing/leverage), could buy options/CFD's - of course need to ensure your super fund has the ability to buy these - you could go SMSF or use products like Macquarie where you the ability to buy these within your super fund

to make this bland statement is incorrect


It must be remembered superannuation is not a separate asset class like property, shares, fixed interet, cash - it is a vehicle, similar to buying those assets classes in your name, partner's name, company name, trust name etc. When your money goes into the superannuation structure, you or someone still needs to determine where it should be invested. For some people, investing through super would be better than investing through their own name or company or trust.

benefits and costs associated with each...it is these that need to be compared!!!

OSS


OSS

 

[MPmelb]

Hi



20k to invest
A: Super... no leverage, 10% returns a year = 2k. 2k exit since no tax?
B: Property... leverage to 100k, 10% returns a year = 10k. 5k exit after tax?

Extremely oversimplified, but just proving a point

So what about all the expenses involved with property - interest on loans, maintenance, real estate agent fees, leasing fees, council rates, body corporate, landlord insurance, vacancy, LAND TAX, etc.

What happens if inflation rises and interest rates go up? It doesn't look so pretty now.

There's a lot of tangibles and intangibles involved with property.

People need to take time to fully understand the Super changes and what they will mean in the big scheme of things before blazenly dismissing it.

 

[cava]

I have never liked superannuation because, historically I have never had any control over it. Theoretically the government could change the goal posts at any given moment and your disadvantaged big time.

However, about 8 months ago we decided to set up our own self managed superannuation fund to park our preserved amount, which had to be kept until 60, and also to get some control over where our investment should be placed.

The rationale was that with the USA grossly going down the financial tube big time, the stock markets were at the greatest risk of collapsing and the domino effect affecting all Australian paper assets ie the stock market, futures and even property etc.

To cut a long story short we invested in unallocated gold bullion with the perth mint in December, and to date the return has been circa 36%. Our own, amatuerish projections, lead us to believe that the price of gold will be 2-3 times the current buying price in 2-3 years time. At which point we might realise the asset and buy into IP's.

However, now that there is more incentive with zero exit tax's I will look very closely at the benefits and consider puting more money into our self funded superannuation fund - but only in gold and physical assets, and certainly not on the ASX.

I thought that this may be of interest to some and just for the record we have 3 properties.

Which ever way you go, good luck with your investing

 

[dodge]

Cava,
Interesting point about gold. I am one how needs to review strategy with negitivae gearing dwindling Gold needs consideration

Gold via super - by way of gold stocks or can you buy direct with a SMSF?

Roger

 

[cava]

Roger,

We bought direct with the Perth Mint. No fees, no insurance costs, no hassel and fully backed by the WA government.

Personally, I would stay away from stocks as, at the end of the day, it's just paper. But as they say each to their own.

Cava

 

[MPmelb]

I have never liked superannuation because, historically I have never had any control over it. Theoretically the government could change the goal posts at any given moment and your disadvantaged big time.

However, about 8 months ago we decided to set up our own self managed superannuation fund to park our preserved amount, which had to be kept until 60, and also to get some control over where our investment should be placed.

The rationale was that with the USA grossly going down the financial tube big time, the stock markets were at the greatest risk of collapsing and the domino effect affecting all Australian paper assets ie the stock market, futures and even property etc.
To cut a long story short we invested in unallocated gold bullion with the perth mint in December, and to date the return has been circa 36%. Our own, amatuerish projections, lead us to believe that the price of gold will be 2-3 times the current buying price in 2-3 years time. At which point we might realise the asset and buy into IP's.

However, now that there is more incentive with zero exit tax's I will look very closely at the benefits and consider puting more money into our self funded superannuation fund - but only in gold and physical assets, and certainly not on the ASX.

I thought that this may be of interest to some and just for the record we have 3 properties.

Which ever way you go, good luck with your investing

Your gold strategy is very interesting cava, and that you say that the USA markets are "going down the financial tube big time". What makes you think this is so?

 

[cava]

Your gold strategy is very interesting cava, and that you say that the USA markets are "going down the financial tube big time". What makes you think this is so?

I monitor the international markets several times per week for the last 4? years.

1. The USA market has a greater debt/GDP ratio than the 1929 depression correction.
2. Every major country in the world including China, Germany, Sweden, Russia, France, India etc are reducing their holding of US$, pushing the US$ closer to the edge.
3. The Federal Reserve's printing presses are running on overtime.
4. The US government is having a lot of difficulty selling it's bonds, which incidently is the first time in history.
5. The US$ is in the process of being displaced as the worlds reserve currency.
6. The Iranian oil bourse, which is based on the Euro, is almost up and running which will result in a slide of the US$.
7. The Norwegians are also trying to set up a Euro denominated oil bourse, again undermining the US$.
8. The US fiscal statement of September 2005 showed that their obligations were US$51 TRILLION which is over four times the level of the US GDP.
9. The current account deficit blew out from US$114 Billion in 1995 to US$805 Billion last year.
10. Then we have the Iraq war on terror financial debacle drawing many millions US$ per day from the system.
11. Remember the terrible response that the inhabitants of New Orleans got after cyclone Katrina devastated them? You would think that the worlds richest nation could respond better, and quicker, than they did.
12. A large number of regional trade meetings do not want the USA to participate. China refused to allow the USA to participate recently in their Asian meeting. South America likewise did the same thing, but invited China! USA is in the process of being ostracised politically on a global scale.
13. GM and Ford have had to dip into their employees superannuation funds to survive.
14. Many manufacturing jobs have been lost to China.
15. The USA housing market is collapsing.
16. The trade weighted US$ index fell from 121.21 in July 2001 to 80.60 by December 2004 and up to 92.26 by November 2005. But now it is sliding again to 85.88 by the end of April 2006. Predictions are it will touch 80.00 again.

Which ever way you look at it, things are not well in the USA, hence my view.

Is this a good enough answer?

Cava

 

[Aceyducey]

All true Cava,

And then there's the other side....

No country in the world wants a repeat of the Great Depression.

Hence it's in the world's interests to keep the US liquid.

Oh, and BTW stocks are not just paper. They are legal shares in a company's assets and earnings. Some are structured so as to not be worth much, but others are very valuable indeed.

Cheers,

Aceyducey