Recently Channel 7 news had a section on choosing the best superannuation fund – it included a snippet from yours truly pointing out that for many retirees superannuation is not a good option. This produced a barrage of queries about why somebody who had been advocating superannuation for more than three decades has suddenly changed his tune.

There is no paradox – superannuation is a tool, which when used properly is highly effective. But like all investment strategies it has a cost. The task for the investor is to decide whether the benefits are worth that cost.

First understand that superannuation is not an asset class like property or shares, but merely a vehicle that lets you hold assets in a low tax environment. When you are accumulating superannuation your fund pays income tax at 15%; when you move to pension mode the tax drops to zero.

So for anybody building wealth while they are working, superannuation is a highly effective tool. Under the current rules people over 50 can contribute up to $35,000 a year and lose just 15% in contributions tax, which will almost certainly be much lower than their marginal rate.

Kelly, for example, earns $120,000 a year and is aged 55. If she took $35,000 in hand she would lose 39% tax ($13,650) and have just $21,350 to invest. The earnings on that money when invested would also be taxed at 39% per annum. However, if the $35,000 was salary sacrificed she would lose just $5,250 in contributions tax and have $29,750 working for her in a low tax environment. This is why the best strategy for people over 50 with a home mortgage is to favour maximising salary sacrificed contributions over ramping up their home loan repayments.

But it’s a different matter entirely when a person is retired. Remember, most retirees are eligible for the Seniors and Pensioners Tax Offset (SAPTO), which enables a single person to earn $32,279 a year tax-free and a couple to earn $28,974 each tax-free. The big question for them after retirement is whether to retain their assets in superannuation, or cash them in and invest them in their own names.

Jack and Mary are retired and their sole financial asset after paying off their home loan is $400,000 in super. They can leave it in super and move it to pension mode, where the money will be in a tax-free environment. However, the cost of doing so will be ongoing fees, the risk of the rules changing, and the possibility of a death tax of 17% when they die.

Alternatively, they could simply cash the money out, and invest the assets in managed funds in their own name. They may well have 30 years to live, so money in the bank is not appropriate. A typical balanced portfolio comprising 20% cash, 40% Australian shares, 30% International shares, and 10% listed property would probably suit them best.

The income from the portfolio should be around $14,800 a year, plus franking credits of $2752. The estimated capital growth would be $16,400 a year, but no tax is payable each year on this. Capital gains are not taxed until the asset is disposed of, which may be years down the track. And then, it enjoys a 50% discount.

They are way under the tax-free threshold, so the money is still in a tax-free environment. Furthermore, they should get a full refund of the franking credits, which gives them a bonus. And they’ll still be eligible for a part-pension, just as they would have been if they’d left the money in super.

Now I appreciate that there is no one-size-fits all solution here. Every case is different, but one thing is certain: the higher the net return retirees can achieve on their assets the longer their money will last. But there’s also the sleep-at-night factor: I understand that many retirees will not feel comfortable managing their own money, even when full-time professional fund managers are making decisions for them. At the end of the day, it’s about self-education and making the best decision in the light of that knowledge.