I was browsing a news website recently and noticed an article which went through the basics of maximising your superannuation for when you retire and the first point the author wrote was to remember that superannuation was not an investment class - it is actually just a tax effective vehicle. I agreed with the point so didn't spend much time on it. When I came to the comments section below though I noticed that there were a fair few readers who posted comments disagreeing with this notion as they had most of their retirement funds invested in superannuation.
This post will go through why superannuation is NOT actually an investment class and why the author of the article was quite right in describing it as an investment vehicle.
You do NOT invest IN superannuation...you invest THROUGH superannuation
The biggest misunderstanding comes about because, like me, many people use superannuation as a set and forget type investment. Most often they are invested in the 'core' or 'balanced' strategy at their fund and the superannuation provider invests their money for them and if they check their superannuation at all it is to make sure that the employer is contributing their funds and to (occasionally) check the balance.
They therefore view superannuation as an investment which whose value they are contributing towards and the valuation of which fluctuates like a normal investment class.
Superannuation is much like a managed fund (which is also a vehicle). Most people understand that they are not actually investing in a managed fund. Rather they are giving their money to a fund manager to invest in shares or property or whatever other strategy their fund may have. Superannuation is much the same. You are giving your money to a superannuation fund to invest in the same asset classes that you could otherwise invest in outside of your superannuation.
The only difference between investing through superannuation and investing in these asset classes yourself is that:
This post will go through why superannuation is NOT actually an investment class and why the author of the article was quite right in describing it as an investment vehicle.
You do NOT invest IN superannuation...you invest THROUGH superannuation
The biggest misunderstanding comes about because, like me, many people use superannuation as a set and forget type investment. Most often they are invested in the 'core' or 'balanced' strategy at their fund and the superannuation provider invests their money for them and if they check their superannuation at all it is to make sure that the employer is contributing their funds and to (occasionally) check the balance.
They therefore view superannuation as an investment which whose value they are contributing towards and the valuation of which fluctuates like a normal investment class.
However this is the wrong way of thinking about superannuation.Superannuation is actually just a tax effective vehicle set up by the government to encourage (and force) people to save for their retirement. You don't actually invest in the superannuation. You invest in underlying assets such as shares, property, fixed interest, infrastructure and other alternatives through a superannuation vehicle.
Superannuation is much like a managed fund (which is also a vehicle). Most people understand that they are not actually investing in a managed fund. Rather they are giving their money to a fund manager to invest in shares or property or whatever other strategy their fund may have. Superannuation is much the same. You are giving your money to a superannuation fund to invest in the same asset classes that you could otherwise invest in outside of your superannuation.
The only difference between investing through superannuation and investing in these asset classes yourself is that:
- You are not able to withdraw from your superannuation account until you reach retirement age (unless there are very special circumstances)
- You get significant tax breaks for investing through super instead of investing on your own (e.g. lower taxes on money invested through superannuation)
It is easier to think of superannuation as a vehicle if you remember how self managed super funds work. This is where you manage your super yourself and invest your superannuation money in whatever you want to invest in (rather than how the superannuation fund invests your money). It is easy to see in this case how the actual investment classes are the shares, property, alternatives etc. that you invest in rather than the vehicle that you set up yourself.
It is actually an important distinction - and one that forces you to think about what your super fund actually invests in
People who think about superannuation as an investment ignore the fact that they should be actively thinking about what their superannuation fund invests in. Although I do not advocate doing it too often, you should really think about what sector allocations you have within your superannuation fund and switch it to suit your own risk profile and views.
That is, a person early in their career should not have the same superannuation choice as one who is nearing retirement. If you think of superannuation as a blanket investment you are possibly going to ignore the fact that you should be thinking about what and where your money is invested.
How do you think about your superannuation and do you view it as a separate investment class or just as one way in which you invest?
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