Superannuation Explained

Information verified correct on October 22nd, 2016

Key Facts

  • Life Insurance funded through superannuation is generally tax deductible.
  • Benefit payments may attract some tax liability if given to non-dependents.

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Saving for retirement years with Superannuation

During our younger years many of us fail to think about the long term future and the prospect of retirement seems such a long way away that it seems pointless to look at issues such as planning for retirement. However, it is important to think about your retirement even though you may think that you are too young, as the earlier you start saving towards your golden years the better a retirement you will be able to have.

There are many different options available to those who want to ensure that they have a comfortable retirement with enough money coming in to enable them to live the lifestyle that they have become accustomed to and to do the things that they want to do when they no longer have work to worry about, such as travel or spend quality time with the family. One of the means of saving towards a more comfortable retirement is known as superannuation, which is a tax effective scheme that can ensure that you are able to enjoy your retirement years in comfort.

What are Superannuation funds?

When you consider the fact that people are living far longer these days and how fast living costs are rising the importance of considering your retirement funding becomes even more obvious. Add to that the fact that you will have possibly several decades of free time without the burden of work to worry about, and you will see why you need to ensure that you have adequate funding for your future. With superannuation you can save towards your retirements throughout your working life and enjoy tax benefits that could help to boost your retirement fund so that you enjoy a financially stress free and comfortable future.

Whilst you are working your employer has to make regular contributions to your super fund and these can be topped up with voluntary contributions by you. These super fund contributions are then put together with the contributions of other members of the super fund, with the funds being invested in a number of different areas, which could include Australian equities, international equities, cash, fixed interest and property amongst other things – the investment choices will be based on your preferences.

How can super help you in your retirement?

Super provides you with a tax effective way of saving towards your retirement, which means that you can enjoy peace of mind and look forward to a relaxing, financially secure and comfortable retirement in your older years. It can also benefit you in a number of other different ways, which includes:

  • Providing you with access to a range of tax concessions and benefits on both contributions and benefits from your super fund
  • Helping you with long term savings
  • Providing you with access to insurance from your superfund provider, which in itself comes with various tax concessions and benefits

Making Your Super Grow

You might be asking then what you are to do. It is not an end of the road situation to make your super grow and work for you. If you work with a financial adviser they can share some of their tips and strategies on how to make your super grow, some of which are included below:

  • Salary Sacrifice: As mentioned, employers co-contribute 9% of your salary to superannuation. If you still want to boost your super in order to get a higher amount later, you should consider salary sacrifice. This means that you can contribute 6% more of your after-tax income to make the total to 15%.
  • Start Early: The wisdom of doing things early is priceless. If you heard that the early bird that catches the worm, then someone who started their contributions at a young age would get higher benefit on his retirement than the one who started late. This is because your contributions have compound returns from your earlier investments – you earn interest on your interest.
  • Track Down Your Lost Super: Statistics have shown that 50% of Australians have unclaimed super funds waiting for them. If we translate that in figures, that would be a total of $12 billion dollars of lost super. By tracking down your super, you will be able to save money. You can start by contacting the Australian Tax Office or ATO or your previous employers where they made their previous payments.
  • Government Boost: If you are a low or middle income earner, you can take advantage of the government co-contribution scheme. Government co-contribution matches up to $1,000 of your personal superannuation contributions.
  • Consolidating your super: By consolidating your super you get to pay lesser fees and paperwork. It also allows you to manage your super easily.

Investing Your Super

Another way of boosting your super is through investments. Contrary to what most believe, superannuation is not an investment vehicle but rather more like a bank savings account, except that you cannot access it until it reaches its maturity.

Because of this inaccurate notion that the super is an investment vehicle, 80% of Australians have their superannuation set on default mode. This means that their super is just there earning a steady but low return.

So if you are dreaming of a very grand retirement, you might consider taking some risks in order to boost your super. There are different investment vehicles where you can place your super – from the low-risk to the high risk.

Low Risk Investments

As the name would suggest, these are investments which have low. If you are a careful investor, you might choose one type of investment under this category. You might note, though, that a lower risk investment also means low return. The types under this category are:

  • Cash: This includes bank accounts and cash management trusts. These are good low risk investments; however, if you think of its returns as a long term investment, you might be disappointed for its low returns.
  • Fixed Interests: These are bonds issued by the government, a company, or a public authority.

High Risk Investments

If you are a really big risk-taker, high risk investments may appeal to you. And with the high risk involved, high rewards and returns are also waiting for you. With careful planning, you could give your super more than the much needed boost you want. There are two types under this:

  • Shares: This high risk investment allows you to own part of a company and gives you access to all its future values and profits.
  • Property: Because of market volatility, investing in real estate is also considered a high risk investment.

What is Superannuation Consolidation

You might have found yourself in one of these scenarios – you’ve held three or four jobs in a number of years, been in some contract jobs, or a dubious part-time job during your university years. If you have been in these situations, chances are, you might have a couple or a number of superannuation accounts under your name. And a bigger chance that you might have forgotten or lost count of them.

You will not find yourself alone under these circumstances since studies have shown that 38% of Australians admit that they have two or more than super accounts. What’s interesting is that more than 6% haven’t any inkling how many super accounts they have.

Studies have further shown that there are around 6.1 million lost accounts which total to $12 billion dollars; so if you have been employed since 1992 and changed jobs or address, there is fair chance that you are one of those millions of Australians who have lost or unclaimed superannuation.

Just in case you are wondering how superannuation gets lost, it is just under these two scenarios:

  • Your old account has not received any contributions in the last 5 years, or
  • Your old account doesn’t have your old address.

Why Consolidate your Super?

There are a number of reasons why it is advisable to bring your super funds together under one account. By doing so, you could gain a lot of benefits from it.

  • Less paperwork. You might be good at multi-tasking but to be doing a number of things together at the same time can be quite stressful, drain your energy, and let you miss other important things you need to focus on. So is it true when you have a multiple of super accounts under your sleeves. Imagine those reports, charges, changes, and insurance benefits that you have to deal with – one set is enough, but how about a number of sets? That means headache. By bringing your super under one account, you have less paperwork. It also makes you manage it easier giving you more peace of mind.
  • Lesser fees. One fund means one cost – one account means one fee.
  • Greater investment strategy. Anyone wants their super to work for them. More than paying lesser fees and managing less paperwork, getting more from your super is the most important. By having one super account, it is easier to devise a strategy that would be appropriate for your needs and goals than having a number of accounts.

How to Consolidate Your Super?

There is no other route to successfully consolidate you superannuation than to plan and commit to it. This is the stage where you plan a strategy of what works and what won’t, of what the risks and what the opportunities are. It is also advisable that you ask your or a financial adviser about this.

  • Find your lost super. You could start your task by collecting all your superannuation statements. If you have no idea where your super accounts are, you can contact the Australian Taxation Office by phone or by accessing their website and go to their Super Seeker section. Another method could be by contacting your previous employers and make an inquiry where they were making payments.
  • Calculate and compare. Before consolidating your superannuation, be sure to calculate how much insurance you want in your super. Check if there is insurance covered in your other supers. You might want to move it or leave it; but once you leave the insurance in your old super account, it will become null and void. Compare different policies and check whatever benefits are there. Some of the things you need to consider about insurance are death, total and permanent disability, and salary continuance. Decide which of these you would hold in your superannuation fund.
  • Check. It is also advisable to check whether a withdrawal fee is needed if you close your account. Although not all super accounts have exit fees, some do. Finding out these little things would make you ready for the unexpected.
  • Be aware of any tax liabilities. When consolidating your super, you also check any tax implications which could affect this move.
  • Choose. After you have done the first steps, choose which super fund is best for you. Having your money in the correct super fund will have a huge impact in your retirement. When choosing a super fund, try to look for important factors such as: 1) fees, 2) performance of the super, 3) cost of changing funds, and 4) insurance coverage.

Finalising Your Consolidation

Once you have chosen which super account you want to consolidate your other funds, there are certain things that need to be required to ensure safety and protection. Because of some reported cases on money laundering acts and terrorism financing, you will be requested to present some documents and identification cards as a proof of your identity. Once it is confirmed, you’re all set to go.

Consolidating your super accounts can save you a lot of time and money. It could also save you from a lot of headaches. In order to enjoy the benefits of consolidating your accounts, starting earlier is better.

Superannuation Tax Benefits

There are various tax breaks and benefits that you may qualify for with super, which is why so many people decide that this is the most effective means of saving towards a comfortable and secure retirement. The concessional tax rate that comes with super investments is designed to encourage you to make provisions for your retirement, so it is definitely something you should take advantage of if you want peace of mind when it comes to your financial future. You will find that whilst you can opt for investments outside of super, the higher your marginal tax rate is the more cost effective you will find it to opt for super investments. This is something that will obviously benefit you in terms of finances and your retirement but also benefits the government, as it hopefully means that more and more people will save towards and be able to fund their own retirement in the future.

There are two ways in which you can invest for your retirement funds:

    • If you opt for investments outside of super, you will be taxed on the money that you earned to put into the investment, and also on the money that you earn from your investment. These are generally taxed at your marginal tax rate, which if you include Medicare levy, can be as high as 46.5%. In addition to this, the money you make from selling the assets is also subject to capital gains tax.
    • If you decide to opt for super investments, you will be taxed on your contributions and on your earnings. However, the amount of tax that you are charged may be much lower as it is a concessional tax rate. The maximum rate you of tax on your contributions and earnings when you choose to invest inside super is capped at 15%. When it comes to the sale of your assets you will also benefit from concessional rates. Whilst you will usually still have to pay capital gains tax on the sale of the assets the rate can be considerably lower than you would pay on non-super assets. In fact, in the pension phase you may not have to pay any capital gains tax at all.

In short, you will generally find that you are far better off investing in super if your earnings are taxed at more than 15% as a marginal rate because the tax rate on super earnings and contributions is capped at 15%.  As an example, if your investment earnings on a non-super investment stood at $1000 and your marginal tax rate was 31.5%, your post tax earnings would come to $685. However, if you had the same $1000 from a super investment and you were only taxed the maximum of 15%, your post tax earnings would be $850, reflecting a difference in post tax earnings of a very significant 24.1%.

Why is super so important?

Many of us know of someone who has retired but is struggling to make ends meet financially, or we see the stories in the newspaper about the effects that the rising cost of living is having on retirees’ quality of life. Having inadequate funding for your retirement will not only affect your ability to do the things that you always dreamed of doing when you no longer had to worry about work, such as travelling, but it can also affect your ability to do basic and necessary things such as paying the bills, buying food and paying day to day living costs. Whilst saving towards your retirement may not seem like an important issue when you are in your twenties or thirties, time quickly passes and many people who think this way suddenly find themselves approaching retirement age with no funding plans in place. This could leave you facing several very bleak decades, with loads of time on your hands but no money with which to enjoy it. By ensuring that you focus on saving towards your retirement from a younger age, you can rest easy in the knowledge that the time you have available after retiring from work can be spent relaxing, enjoying life and achieving your goals.

Super is also important because of the great tax breaks that you can get with a super fund. The fact that people are living longer has put strain on the public purse, as it means that there is less money to go around when it comes to pensions. Also, with fewer people working and paying taxes the strain on government funding is heightened. This is why the government is keen to encourage people to take steps to save towards their own retirement and by way of incentive offers impressive tax concessions and breaks to those who do this.

If you want to ensure that you do not become one of the many retirees who finish their working lives with nothing but financial stress to look forward to, sorting out your super at the earliest opportunity is essential.

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