The contentious area of contribution caps is something that many SMSF trustees grapple with, but a new report may re-cast this as an overdone concern, especially regarding the eventual level of retirement savings that members end up with.
A related factor (about which many may have already pondered) is how much of one’s eventual total superannuation savings upon retirement will be made up of contributions made over the years, and how much will be the result of compounding investment returns?
A recently released Productivity Commission (PC) draft report, How to Assess the Competitiveness and Efficiency of the Superannuation System, emphasises that net returns are a “key determinant of a member’s ultimate retirement income”. (Download the draft report from this PC page.)
Of course personal circumstances will influence the answer — including years in the workforce, the size of contributions (both compulsory and voluntary), asset allocation of your portfolio and the performance of investment markets, among other highly-variable factors.
The PC’s draft report quotes a submission by the Association of Superannuation Funds of Australia (ASFA, download its submission here) saying that net investment returns would make up “around 70%” of the value of super savings at retirement of an individual on average earnings with “contributions throughout a full working life” (see page 4). The remaining 30% would of course be funded by contributions made over the years.
Most fund members on average work remuneration would typically rely on superannuation guarantee contributions to regularly add to their super capital, although of course members with higher income may have the means to accelerate the process with salary-sacrificed and/or personally-deductible contributions.
In its report, the PC says: “The sheer size of the superannuation system, combined with its compulsory and broad nature, makes the efficiency of the system paramount. Even small changes in efficiency can have significant impacts on the wealth and wellbeing of Australians.”
It is this contention that effectively underlines the benefits of compounding investment returns over the long term, particularly in a concessionally-taxed environment, to effectively provide for a comfortable retirement. Compounding returns occur as fund members earn further investment returns on the returns already made from past investments, as well as on their existing capital (or contributions, in this context).
ASFA’s submission divides superannuation providers into three main types:
- SMSFs – where all of the members are also trustees and control all decision-making;
- choice products – which members have chosen to acquire to meet their needs for investment choice, tailored insurance and/or other services;
- MySuper – which are chosen by employers as “default” funds for their employees, in the absence of employees making an individual choice as to their superannuation fund.
The ASFA submission to the PC says: “Not only do these three different types of superannuation products reflect markedly different business models, more importantly they reflect significantly different degrees of member choice and control.”
As such, it has been recognised that “consumers tend to be attracted to setting-up an SMSF” because they give members “unfettered control (apart from regulatory constraints) over their investment and divestment decisions”.
Given the revelation that 70% of eventual total retirement savings is due to investment returns, not contributions, this control over investment decisions has been cast in an even more favourable light. “As trustees of SMSFs make all of the decisions with respect to the operations and investments of the SMSF they control the inputs/expenditure and have maximum influence over the investment outcomes.”