Superannuation is a form of saving for retirement.
15 March 2016: It's a way of building up a nest egg over time so that you will have money to live on when you are no longer working. Superannuation is becoming more important as every year passes; our population is ageing and the likelihood of having a pension to fall back on is diminishing all the time.
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Superannuation is a way of ensuring that you will have a source of income in retirement and minimise the need for government assistance. It has other advantages as well: it gives fund members access to cheaper insurance, such as life, disability and income protection cover. It's also taxed at a lower rate (15%) during the accumulation phase, making it a very attractive form of investment.
Superannuation works in the following way
- Your employer makes compulsory contributions on your behalf (currently 9.5% of your gross salary) into a super fund nominated by you or your employer.
- You have the option of making your own contributions as well, and the government may also contribute if you are a low or middle income earner.
- Your superannuation fund invests the money on your behalf and grows steadily over time, accelerating in the last few years when the sum is greater.
- You retire from working life and access your superannuation, either in the form of a lump sum payment or as a regular income stream.
In the past, people relied on their personal savings in retirement, often topped up with a government pension, but things are changing. We are now living up to 20 years longer in retirement, and our superannuation is an important source of income if we want to maintain a reasonable standard of living when we’re no longer part of the workforce.
Super in Australia is government-supported and encouraged and minimum provisions are compulsory for employees. Employers are required to pay a proportion on top of an employee's salaries and wages into a super fund. People are encouraged to further supplement their super by making their own contributions. From 1 January 2014, employers have been required to pay default contributions to an authorised MySuper products. The minimum obligation requirement by employers is planned to increase from 9.5% to 12%, gradually increasing annually between 2021 and 2025.
- How does superannuation work?
- Is superannuation compulsory
- How do I choose a super fund?
- What are the types of super funds available to me?
- Superannuation for individuals
- What are the tax benefits of super?
- Superannuation for employers
- How to maximise your super
- Are self-managed super funds (SMSF) right for me?
- Duties and obligations of an SMSF trustee
- How do I find my lost super?
- Rollover Super
- How much you will need for your retirement
- When can I withdraw my super?
- Superannuation contributions
- Withdrawing preserved funds from your super
- How can I protect my super fund?
- Can money from your super fund be used by your employer?
- What if your employer goes out of business?
When you start a new job, you can nominate the superannuation fund you want your employer to contribute to on your behalf or you can use the employer’s preferred fund. In some jobs and industries, you may not have a choice, as there may be a preferred fund under an existing industrial agreement. Members of defined benefit funds do not have the option of choosing a super fund.
To find out if you have the option of choosing your own fund, you'll need to speak to your employer. You can also get in touch with the Australian Tax Office (ATO) around any information about choosing a super fund. Check with your current employer to find out if you choose your own fund. There is also information available on Government websites about choosing your own fund. If you can choose your own fund, your employer will supply a "standard choice form" when you being employment. The form will list your options when choosing a fund and you can choose to go with your own, or your employer's.
Also, you'll need to supply your Tax File Number (TFN) to ensure you're not taxed at the maximum rate. This also ensures your super account is easy to find.
There are some things to look out for when comparing the merits of various super funds. These include:
- Fees. How much a fund charges in fees is very important to know, as it can have a big impact on how much superannuation you ultimately receive in your retirement.
- Investment options. Make sure you are comfortable with the kinds of investment options the superannuation fund offers (such as acceptable returns without too much risk).
- Performance. Choose a fund that has been performing consistently well over the last five years or so.
- Insurance. Look at what insurance options the fund offers and whether they represent good value for money.
- Extra benefits. Sometimes your employer could make additional contributions for you above the 9.5% threshold. This means more money in your super account.
- Customer Service. Get in touch with the customer service centre or browse it's website to see what other benefits they offer.
If you are comparing superannuation funds because you are thinking about switching to a new fund, bear in mind that there may be hidden penalties for doing so. Before switching, make sure that the exit fees from your old fund don’t cancel out the benefits of your new fund. Also consider any forms of insurance you may have with your old fund. If you lose this cover by switching funds, it may be harder to get equivalent cover, especially if you are over 60 years of age or have pre-existing medical conditions.
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There are two general forms that superannuation funds take: accumulation funds or defined benefit funds.
Accumulation funds grow your money over time. In an accumulation fund, you bear the risk that your super will payout will be lower if financial markets drop. Your final payout figure is determined by:
- How much you and your employer have contributed.
- How much you have earned from investments.
- How much your fund has charged you in fees over the years.
- The investment option you choose.
- How much you receive in bonus contributions.
Defined benefit funds
Defined benefit funds are determined by fund rules. In a defined benefit fund, your employer or the fund generally takes on the investment risk. Be aware that defined benefit funds can be affected by market downturns and some employers or funds may have difficulty taking on the market risk. Your final superannuation payout is determined by:
- How much you and your employer have contributed.
- How long you have worked for your employer.
- Your final salary when you retire.
Defined benefit funds are less common than accumulation funds and are often only available to public sector or corporate employees. The majority of superannuation funds these days are accumulation funds, which are usually available to everyone.
Never leave a defined benefit fund unless you're very sure that you will be better off. Some of them are very generous.
The seven basic types of superannuation funds are as follows:
- MySuper. Many super funds offer an account called MySuper and these will eventually replace default accounts. Default super accounts and automatically chosen by your employer if you don't select one. MySuper accounts offer lower fees, simple features and single or life stage investment options.
- Retail funds. Retail funds are run by financial institutions for a profit and are the most common type of superannuation fund available. Membership is open to everyone and they offer a large variety of investment options, but they also charge fees for their services.
- Industry funds. Industry funds are sometimes open to everyone, but membership is often restricted to those working in a particular industry. They are usually low-fee funds. Because industry funds are not-for-profit, all profits are re-invested in the fund.
- Public sector funds. Public sector funds restrict membership to federal and state government employees. Like industry funds, they are usually low-fee funds and the profits are returned into the fund for the benefit of members.
- Corporate funds. Corporate funds are arranged by companies for their employees. They may be run by the company itself, in which case the profits will be re-invested, or they may be run by an outside retail fund, in which case some profits will be retained by that fund.
- Self-managed super funds (SMSF). Self-managed super funds are set up by individuals, often to gain more control over their superannuation. Members of an SMSF must also be trustees, unless a corporate trustee is appointed, and they are ultimately responsible for the management of the fund, including investment and taxation compliance.
- Eligible rollover funds (ERF). An eligible rollover fund is a holding account for lost or inactive members with low account balances. These funds often have low investment returns and may charge high fees. Your money is likely to grow faster if you merge your ERF with your active super fund.
Individuals can grow their superannuation in four main ways:
- Employer contributions. This is the main source of money paid into an individual’s superannuation account. According to the Superannuation Guarantee, an employer must pay at least 9.5% of an employee’s gross salary into their superannuation account every quarter.
- Employee contributions. An individual can also make extra contributions over and above what their employer contributes. The government may match employee contributions, but they are capped at $50,000 per year, after which the tax rate jumps from 15% to 31.5%. This is to prevent high income earners from using superannuation as a cheap form of investment.
- Salary sacrifice. This is similar to employee contributions except that it involves making a pre-tax rather than post-tax contribution to your superannuation, which effectively increases your contribution while reducing your taxable income. However, salary sacrifice still counts towards the $50,000 cap.
- Government contributions. You may be eligible for either the super co-contribution or the low-income super contribution (LISC) or both, meaning the government will add to your super. You don't need to apply for LISC or the co-contribution. If you're eligible, have lodged your tax return and your fund has your TFN, the government will pay it to your fund automatically. The government's contribution is a maximum of $500 as of 2014.
More on salary sacrifice
You've heard this term before but what does it mean? If you earn more than $37,000, you may want to consider salary sacrificing due to tax benefits. By choosing to sacrifice a portion of your before-tax salary into your super fund, you get taxed at 15%. If your marginal income tax rate is more than 15%, this could provide benefits. Salary sacrifice will boost your super.
Due to the benefits, the Government has imposed a limit on how much you can sacrifice per year. Most can salary sacrifice up to $30,000 inclusive of the existing 9.5% guaranteed contribution. There are higher caps for people aged over 50. This amount is $35,000 inclusive of the 9.5%. Keep track of your super by regularly going online and monitoring the performance of your super fund. Superannuation is an investment and with any investment, comes some risk. So if you want to be sure that your super is still performing well, check your fund regularly.
Super has become one of the most cost effective ways to save towards retirement because of the tax benefits. Favourable tax rates mean that the maximum tax rate on your employer's contribution and on the income you earn from the investments made via the fund will be 15%. Contributions made through salary sacrifice are taxed at 15%. Once you reach the age of 60 you should be able to withdraw your super benefits tax free, either as a lump sum or as an income stream. You may even be able to enjoy tax benefits if you are contributing to the super of your spouse.
For those who receive income from a super fund source, you could be entitled to these tax offsets:
- 15% of the taxed element
- 10% of the untaxed element
Your payment summary will show how much tax offset is available to you.
If you're under 55 years of age, you're not entitled to tax offsets from a super fund source unless it's coming from a:
- Disability super benefit.
- Death benefit income stream.
- Death benefit income stream.
If you're under 60 years of age, you're not entitled to tax offsets from a super fund source unless it's coming from a:
- A death benefit income stream and the deceased died after they turned 60 years old.
As an employer, you have an obligation to pay your employees 9.5% of their gross salary into their super fund every quarter. This minimum amount is called the super guarantee (SG). Employees include contractors (if you are paying them mostly for their labour) and also temporary Australian residents. The super fund must be one nominated by the employee or, if they have no preference, one nominated by you or a default fund. It must be a complying super fund, and you will be required to supply the fund with your employee’s TFN.
If you do not pay the required amount for each employee into their fund by the due date in each quarter, you will be required to pay a super guarantee charge, which is effectively a late payment penalty. You will be charged interest on what is owed as well as an administration fee. Records you will need to keep regarding employee superannuation payments include a record of how much super was paid for each employee, how that amount was calculated and evidence that employees were offered the choice of which superannuation fund they wished to contribute to.
In summary, you need to pay super unless this situation applies to you:
- You're a non-resident employe working outside of Australia
- You're a foreign executive who holds certain visas or entry permits.
- You're an employees paid under the Community Development Employment Program.
- You're a member of the army, naval or air force
- You're an employee temporarily working in Australia covered by a bilateral super agreement. You'll need to keep a copy of the employee's certificate of coverage to verify the exemption.
Many people usually ignore superannuation and don't want to look after it. This is not smart. There are some very straightforward steps that will help you maximise your super. Here are five actions that you should consider doing:
- Accept more risk. One of the best ways to get more from your super involves adopting an age-based investment strategy. This includes working out how much risk you can afford to take based on your years to retirement. Age is crucial because if you have more years to your retirement, you'll have more time to recover from a major setback. You can also use more years to contribute more to your super. As for older Australians, those in retirement often become obsessed with avoiding investment loses and so increase their risk of getting poor returns and running out of money. Try to avoid this common error.
- Dump your fund if necessary. Make sure you are constantly monitoring your fund's performance, especially the long-term performance. If the investment option is performing poorly, it's time to do something. You may be able to switch investment options but sometimes you will have to change super funds entirely. It's also important to check insurance fees and not just the fund's performance. Most employees have the right to switch super funds, but this is not for everyone.
- Set up a self-managed super fund (SMSF). If you're prepared to put in the effort as well as take on responsibility for managing your super, it's worth considering setting up an SMSF. Having an SMSF can help you get more out of your super in a range of ways including saving fees. Although an SMSF may cost more to start with, you'll have the option of controlling how your super is invested.
- Maximising your tax breaks. Contributions to super made by or on behalf of employees and which are financed out of pre-tax income are taxed, in effect, at 15%. This generates a valuable tax saving for most people, since most employees have a marginal tax rate of at least 31.5%. Direct part of your pre-tax salary into your super and this is a smart way to maximise your savings.
- Start early, make more. Starting to save from an early age can make a huge difference to how much you have when you retire, mainly due to the power of compounding. For example, if someone saved $10,000 a year for 20 years while someone else saved the same amount for 35 years, both earning a return of 6% a year, the 20 year compounding amount would generate $367,856 and the 35 year saver would generate $1,114,348 - more than three times as much.
There has been a growing trend in recent years for individuals who are frustrated with the way their superannuation is being managed to start their own super fund. Managing your own superannuation gives you greater control over where your money is invested and provides access to less conservative investment opportunities than those available to the average retail fund such as shares, direct property and alternative asset classes. However, with this greater freedom comes greater risk. Most conventional superannuation funds concentrate on conservative options for the majority of their investments, which may only produce moderate returns but are also relatively low-risk. Putting your super funds into higher risk investments may produce higher returns, but it could also lead to disaster if you don’t know what you're doing. Because of this, SMSFs are more suited to those with the time and financial and legal expertise to manage a fund so that opportunities are maximised and exposure is kept to a minimum. Self-managed super funds can also be very costly to run. Because the members are also trustees, they are solely responsible for all aspects of the fund, including legislative compliance and taxation. An SMSF can have one to four members.
These include but are not limited to:
- Ensuring that the fund is run solely for the purpose of providing retirement benefits to its members.
- Managing investments in accordance with the law and in the best interests of fund members.
- Ensuring that personal and fund business affairs are kept entirely separate from each other.
- Arranging an annual audit of the fund by an approved SMSF auditor and reporting to the ATO on the fund’s management.
- Carry out the role of trustee or director, which imposes important legal duties on you.
- Set and follow an investment strategy that ensures the fund is likely to meet your retirement needs.
- A large amount of money in the fund to make the set up and yearly running costs worthwhile.
- To budget for ongoing expenses such as professional accounting, tax, audit, legal and financial advice.
- Enough time to research investments and manage the fund.
- The financial experience and skills to make sound investment decisions.
- To organise life insurance, including income protection and total and permanent disability cover.
Before you start making investments, you must have an investment strategy. Your strategy will help specify and achieve your fund's objectives. Here are some things you need to consider when making an investment strategy:
- Diversification (investing in a range of assets and asset classes).
- The liquidity of the fund's assets (how easily they can be converted to cash to meet fund expenses).
- The fund's ability to pay benefits (when members retire) and other costs it incurs.
- The members' needs and circumstances (for example, their age and retirement needs).
Another trend in recent years has been the search for lost and unclaimed superannuation. Because people tend to move around a lot more than they used to, both between jobs and residential addresses, many super accounts have become lost or been left behind to sit in funds and gather dust while still attracting fees. Consequently, the government has undertaken an awareness campaign to remind people that there are literally billions of dollars in unclaimed superannuation out there and some of it may be yours. The ATO has created an online search platform known as SuperSeeker, which people can use to search for any superannuation associated with their name or tax file number. If any old superannuation accounts are found, the ATO will give you the details of the fund in question and provide information on how to go about rolling this super into your current super fund. Having several superannuation accounts scattered around in different places, all attracting their own set of fees and charges, could be seriously reducing your overall super investment. By rolling them all into one fund, you will then know exactly where your money is and will only pay one set of fees.
How many super statements did you receive this year? Is it hard to keep track of your different super accounts? Here are some of the benefits of putting your super into one account:
- You save costs by paying only one set of fees.
- You reduce your paperwork.
- You make it easier to keep track of your super.
If you've located an old super account and now wish to roll it into one fund, these are the steps to take:
- Complete a Rollover Initiation Request form (NAT 71223) and send it to the superannuation fund that has your old account, requesting them to transfer your super to your nominated fund.
- The superannuation fund that has your old account will usually process your request within three working days.
- Once the transfer has been completed, you will be sent a rollover benefits statement, which you should check carefully and retain for your records.
- Tell your employer and make sure they know where to pay your super and how to correctly identify you to the fund.
Before deciding which fund to roll your super into, you need to consider which one offers the best options and what penalties may be imposed by other funds for closing old accounts. Things to look at include:
- Which fund offers the lowest fees?
- Which fund has the best investment track record?
- What exit and entry fees may apply?
- Whether you will lose any insurance cover that would be hard to replace.
As with any financial decision, if you are at all uncertain about your options regarding rollover super, seek professional advice before making any decisions that may affect your retirement nest egg.
Many people ask themselves how much they are going to need for their retirement, but this question is difficult to answer because there are so many different factors to take into consideration. If you are still relatively young, the cost of living could be far higher by the time you retire. You also need to consider possible changes to your circumstances, which will also factor into how much you need for your retirement. Some of the things that you need to consider in terms of expenses when you retire include:
- How much you will need for accommodation: You may be one of the lucky ones who will be living in your home with the mortgage all paid off by the time you retire. On the other hand, you may be in rented accommodation and will therefore still have to factor rental costs into your income needs.
- Maintenance costs: If you live in rented accommodation, many of the costs related to home maintenance will already be covered by your landlord. However, if you plan to be living in your own home, you will need to ensure that you have money available to deal with any maintenance costs.
- Bills and rates: When you retire, you still have to pay bills and rates. You should think about the different bills and rates that you will need to cover when you retire.
- Food and clothing: Other essentials that you will need to consider when working out what your outgoings will be when you retire include food and clothing.
- Vehicle maintenance: If you plan to be independent and travel in your own vehicle when you retire, you'll also need to think about the cost of running and maintaining a vehicle, which includes the cost of petrol, tax, insurance, and any repairs and servicing that may be required.
- Healthcare and medical expenses: It's a sad fact, but our health tends to deteriorate as we get older. Even if you are healthy now, you still need to think about covering the cost of health care and medical expenses when you retire.
- Insurance cover: You may have a range of insurance policies that you need to stay on top of when you retire, such as vehicle insurance, home insurance, medical/health insurance and life insurance. Although the individual premiums may not be huge, the costs can mount up.
- Other costs: You'll also need to think about the things you may want to do when you retire. Unless you plan to spend your retirement sitting in the house looking at four walls, you need to think about the cost of entertainment, how much you might need if you are planning to travel, and even the cost of enjoying more time with your loved ones (such as visiting relatives or taking the grandkids out). You may also want to consider putting money aside to help your loved ones, as many grandparents these days like to provide financial assistance to their grown-up kids or grandkids.
The general rule of thumb is that you should aim for around 60% of your pre-retirement income in order to enjoy a comfortable retirement, although this will depend on the financial commitments and outgoings you think you will have by the time you retire.
Super benefits are subject to rules to protect your entitlements. Sometimes you'll be able to withdraw your super early, but there are preservation rules that prevent you from accessing your benefits until you satisfy a condition of release. There are several preservation rules and your super may include one or more of the following categories of benefits:
- Preserved benefits: these include all contributions and all earnings for the period after 30 June 1999. Preserved benefits can only be paid to you if you meet a condition of release.
- Restricted non-preserved benefits: these include all contributions you made between 1 July 1983 and 30 June 1999. As with preserved benefits these can only be paid to you if you meet a condition of release.
- Unrestricted non-preserved benefits: these include money held in your fund that you can access at any time, if your fund's rules allow it.
Super laws provide specific rules for when you can access your super. These are called conditions of release. In addition, the trust deed of your super fund may set out more restrictive rules around payment of benefits. You can access your super when you meet these conditions of release:
- Reach your preservation age and retire.
- Reach your preservation age and choose to begin a transition to retirement income stream while you are still working.
- Are 65 years old (even if you have not retired).
Whether you work on a full-time basis, a part-time basis or even on a casual basis, if you earn $450 or more per month, you will be entitled to superannuation guarantee contributions. This is where your employer must contribute 9.5% of your salary as super. This must be paid at least quarterly, and your employer should inform you of the contributions that have been made towards your super. It's important to remember that you can also make personal, voluntary contributions to your super, which is highly recommended if you want to enjoy a more comfortable retirement. It's best to do this through what is known as 'salary sacrifice', where the money comes out of your pre-tax salary. This is because you will then benefit from the lower contribution tax rate of 15% rather than being taxed at your personal tax rate, which could be up to 46.5%. In short, the contributions that go towards your super can come from the following sources:
- Compulsory contributions made by your employer.
- Salary sacrifice contributions made from your pre-tax pay.
- Personal contributions that you make from your taxed income.
- Government contributions through the co-contribution or LISC.
The basic idea behind your superannuation fund is that you build up a retirement nest egg through the investments made by the trustees who manage the funds on behalf of members. Therefore, under normal circumstances, you cannot get your hands on the preserved funds from your super until you retire. However, there are other extenuating circumstances under which you may be able to withdraw your preserved funds, such as:
- When you retire: Your preserved funds are generally made available when you retire, which could be between the ages of 55 and 60, depending on your date of birth.
- Total and permanent disability: You may be able to withdraw your preserved contributions if you suffer total and permanent disability.
- Terminal illness: You can withdraw on preserved funds if you are under 60 years old and have a terminal illness.
- Death: If you pass away, your preserved funds are paid out to the person you named as a beneficiary. If you did not name a beneficiary, the trustees of the fund will usually determine who will receive the benefits in the event of your death.
- Financial hardship: You may be able to withdraw preserved contributions if you can prove financial hardship or other compassionate grounds. This is a decision that would be made by the trustees of the super fund based on your situation and your circumstances.
For many people, their super is their main security for the future in terms of finances, which is why so many people want to ensure that everything is in order with their fund and that their retirement funds are safe and secure. Whilst the fund is controlled by the trustees, many people want to keep on top of information relating to their superannuation fund for peace of mind, as this way they can ensure that they are up to speed on what is actually happening with their finances. There are a number of areas that you may want to know more about in order to enjoy greater peace of mind over the protection and safety of your super fund and some of the common concerns that superannuation fund holders may have are outlined below.
If you're worried about your employer using your super, don't be. The money that is accumulated in the account is held in trust, which means that it's not available for your employer to use.
In the event your employer goes out of business, your super fund will still be protected since it's operated by either a super fund of your choosing or yourself.
Do the trustees of your super fund have specific responsibilities?
The trustees of any superannuation fund have to make a lot of important decisions and choices but they also need to follow responsibilities as set out by the Superannuation Industry Act. These responsibilities include:
- Ensuring that they always act honestly.
- Investing money carefully and properly, taking professional advice if they wish to.
- Ensuring that there are adequate reserves in the fund to pay the benefits of the member when the time comes.
- Keeping the assets of the fund separate from the employer.
- Providing statistics, documentation, statements, etc to enable consumers to see how their funds are performing.
- Maintaining accurate records and accounts of the superannuation fund.
What are the record keeping responsibilities of trustees relating to super funds?
There are a number of record keeping responsibilities that trustees of superannuation funds need to adhere to in line with the Superannuation Industry (Supervision) Act. This includes the following:
- The maintenance of accurate records in relation to the superannuation fund.
- Ensuring that all accounts relating to the superannuation fund are kept up to date and accurate.
- Keeping copies of certain reports and maintaining records of trustee meetings.
- Ensure that the accounts are audited on an annual basis.
- File an annual return with the Australian Prudential Regulation Authority.
What sorts of things do trustees have to take into consideration pertaining to super funds?
The trustees of superannuation funds have to make some very important and impactful decisions, so it is little wonder that many fund holders are eager to know what the trustees take into consideration when making choices and decisions. Under the Superannuation Industry (Supervision) Act, trustees are asked to take into consideration a number of different things with regards to superannuation funds. This includes:
- Risks and returns: Trustees are asked to take into consideration the risks and the likely returns that can stem from investments taking into account the fund objectives and the investment strategy.
- Diversity of investments: The Act asks trustees to consider the variation and diversity of the investments in the fund's portfolio e.g. looking at spreading investments across different asset classes to reduce risk rather than having all of their eggs in one basket.
- Liquidity: Under the Act trustees are also asked to take into consideration the liquidity of the investments in the funds based on its cash flow requirements.
- Meeting liabilities: Trustees are also required to take into consideration the needs of the superannuation fund in relation to being able to meet its current, as well as its possible future, liabilities.
How do I find the right super fund for me?
Superannuation is a vital form of saving for retirement. Whether you manage your money yourself or through a traditional fund, how wisely that money is invested and how much of it is eaten up in fees will ultimately determine how big your nest egg is and how enjoyable your retirement years will be.