Ten things you need to know about your super this year

From July 1 the amount an individual can have in super where the earnings are tax-free moves from $1.7m to $1.9m.

It’s time to take a long hard look at your super. Unless you are a ­financial wizard, you lost money last year.

At least 10 per cent of your salary went into a fund that most likely dropped lower. If you are retired, it’s harder still – your income is going to be squeezed.

Super is again emerging as a political battleground. Some key changes are already set in place, while other developments will hinge on what the federal government unleashes in the May budget. Here’s what you need to know.

6.1 per cent is how much you can expect to make each year

The average return for the average balanced fund since 2000 is 6.1 per cent – that’s $61,000 a year for every $1m you can get into super. After years of double-digit returns in 2017, 2019 and 2021, 6.1 per cent might sound modest, but it is entirely reasonable. In fact, 6-7 per cent is what you can expect over the long term. The period of artificially low rates that pumped up annual returns is over. Calculate your investments using a 6.1 per cent annual return.

Minus 5 per cent was the damage last year

We now have two major reports assessing how super accounts fared in 2022. Super­Ratings issued its average balanced return this week and found it was minus 4.8 per cent. Late last year ChantWest did a similar exercise – it reported a figure of minus 4.6 per cent. It was a bad year for everyone in every asset class but by no means dramatically bad. We have had four negative years since 2000. In 2002, we had an identical return of minus 4.8 per cent and in the horror GFC year of 2008 the average super fund fell 20 per cent.

The “cap to end all super caps” is coming

Anyone with big money inside the super system knows it’s a tax shelter that’s too good to be true because the amount you can have taxed at just 15 per cent remains unlimited. There are 11,000 people with more than $5m in super. The Coalition imposed a limit on the amount you can have “tax-free” inside super – but never introduced the “cap to end all caps”, which is a limit on how much you can have inside the super system on the 15 per cent rate. Key players in the sector are pushing the government to introduce a $5m cap and the government is preparing the ground to make the change.

There will be a range of tech­nical difficulties on how this will be done.

But politically, this is low-hanging fruit.

 

You can put an extra $200,000 into super tax free this year

The outsized inflation reading of 7.8 per cent this week has triggered what’s called a double indexation in super – it means that the amount of money that can be put into tax-free super is going to get an outsized lift as well. From July 1, the amount an individual can have in super where the earnings are tax-free will move up from $1.7m to $1.9m. This is a significant change – the tax-free limit has only moved higher once since it was introduced in 2016. With pressure building on the government to clamp down further on super tax concessions, there is a risk that federal Treasurer Jim Chalmers will announce a freeze of the indexation in the budget on May 9. Advisers are telling wealthier clients to keep plans on hold until we get past the budget.

Green super funds may continue to extract a high price

One of the key factors in this year’s super returns was the poor returns from green-focused super investments. Super funds with a strong focus on environmental, social and governance (ESG) ­issues regularly did twice as badly as average balanced funds. The losses were due to missing the rebound in oil and coal prices, while fully capturing the sell-off in “clean” technology investments. There is nothing to say these funds won’t lose money-making opportunities again this year. Green-focused funds will perform well when mining is on the ropes and miss the lift when commodity prices are strong; it happens in every cycle and it hits younger savers hardest as they are the biggest users of ESG-­focused funds.

 

The tax police just lifted fines by 25 per cent

The ATO has just managed to bring in a serious increase in fines. You might think inflation is high when it is running at 7.8 per cent. But the ability of the tax office to impose fines has been increased by 25 per cent. For all transgressions on tax, the infamous penalty units went up 25 per cent – from $222 to $275 – on January 1. On top of that, the ATO has a special unit looking at self-managed super funds targeting funds that were created so that money could be withdrawn ­illegally before retirement. There were 280 trustees disqualified in the six months to December.

Super-linked downsizing is now wide open

The government had continually reduced the age of access for the super downsizing scheme. Since January 1 it is 55, which means just about anyone will be able to use the scene. Under the terms of the arrangement, you can sell the family home and use the proceeds to put the money into your super fund even if you would not qualify under existing rules due to your age or assets. For older Australians who did not get to put money into super when they were younger, it’s a good way to catch up.

 

New players are nowhere to be seen

New competition in super would be welcome. The big industry funds dominate the sector and the ranks of retail players has reduced. The major contender is the giant US mutual group Vanguard. It finally launched its mainstream super product this year to a lukewarm response as many had expected the offering would be much cheaper. Alternatively, new niche players such as Spaceship or Cruelty Free Super are popping up with mixed standards and results. Perhaps this year Vanguard will mount a real challenge to the incumbents. It certainly won’t be coming from the recent wave of “alternative” new entrants.

 

Big super’s mystery investments are a worry

Some of the best returns among the top funds come from a murky category broadly defined as unlisted investments; that is, investments not on public markets where we cannot see their prices or value. Unlisted investments in property and infrastructure were a key reason that average losses in balanced funds were cushioned last year, while overseas players in the same space were feeling the pinch. Blackstone, the US private equity giant, had to halt redemptions in a key fund as the sector was rocked by a parallel plunge in listed markets. Do the big funds massage the numbers on unlisted investment returns? Sooner or later this issue will come to the boil, most likely when a crisis erupts. The regulators are circling the big funds on this issue but the funds are not going to change their ways unless they are compelled to do so.

Your super may have substantially recovered already

Don’t fret about the 5 per cent drop in 2022. And don’t expect a return to the 14 per cent return of 2021 either. Even since the end of last year there has been a clear upswing across markets. The sharemarket rebound has been strong – in Australia it is up 8 per cent since the start of the year and nearly 15 per cent since mid 2022. In Europe it is up 25 per cent since September and in the US it is up about 6 per cent year to date. Separately, the return of some normal setting in rates means that other asset classes can again offer positive returns such as bonds and even cash. This year, your super should recover. How much might your fund make? A reasonable assumption would be 6.1 per cent.