For many people, super is one of the best ways to accumulate wealth, as it provides significant tax concessions to help you save for your retirement.
Most Australians have a personal super and/or an Employer super.
Some employers allow choice of fund, which means employees can direct their SG contributions to the personal super fund of their choice. This gives them more flexibility in terms of investment choices and the levels of insurance held within super. Effectively, they can “shop around” for a better deal.
What is super?
Superannuation is a specialised type of investment designed to help you accumulate a significant level of savings for your retirement.
To encourage you to invest using super, the government provides special tax advantages for super investments. For most people, these tax advantages make saving through super more tax effective than saving outside it, which means their savings can accumulate faster.
In return for the tax advantages, the government restricts when and how you can access your super – generally you need to wait until you retire.
Why is super important?
Australians now have a higher life expectancy than ever before. Current figures show that on reaching the age of 60, the average man will live for another 22 years and the average woman for another 26 years.
It is unlikely that the government Age Pension alone will give you the financial freedom you want for the 20 or more years you are likely to spend in retirement. The Age Pension is designed to provide a basic income, but most people want a lot more from their retirement years.
What types of super fund are there?
When saving for your retirement, there are a variety of options to choose from. There are four main types of super funds:
- public offer funds
- corporate funds
- industry funds
- self managed super funds (SMSFs).
Under Australian superannuation law, you can choose to contribute your personal superannuation contributions (and in some cases, direct your employer to pay super guarantee (SG) contributions) to the superannuation fund of your choice. Your financial planner can help you decide which type of fund is best for you.
What can super funds invest in?
Many people don’t realise that superannuation funds hold your money and invest it in different asset classes depending on the type of option you selected when you opened your super account. For example, if you selected a high growth option, your money will primarily be invested in Australian and global shares, with a smaller allocation in low-risk investments such as cash.
The mix of investments that is appropriate to your needs will depend on your investment goals, your investment time frame and your attitude towards risk.
Who can contribute to a super fund?
Contributions to a super fund can be made by:
- Employers making compulsory SG contributions of 9% of earnings for most employees.
- Employees making additional contributions to a fund of their choice from their pre-tax or after-tax salary.
- Self-employed making after-tax contributions.
- Contributing to your spouse’s super fund.
If you are under age 65, there is no restriction on your ability to contribute to superannuation. However, those aged 65 and under 75 need to satisfy the ‘work test’ (gainfully employed for at least 40 hours within 30 consecutive days in the financial year to which the contribution relates). Super guarantee contributions cannot be made by your employer once you turn 70.
Accumulating super
There are several different types of super contributions; however, these can be divided into two categories:
- concessional (pre-tax) contributions
- non-concessional (after-tax) contributions.
If you are employed, your employer will generally contribute 9% of your salary into super for you (known as SG contributions). You can also choose to sacrifice some of your pre-tax salary directly into super. This is known as ‘salary sacrifice’. In addition, you can make personal contributions (such as spouse contributions) from your after-tax salary.
Is there a limit to the amount of super you can save?
To encourage you to save for your retirement, you can now accumulate as much money as you like in super, and all of it can be withdrawn tax free once you turn 60.
However, the government has set contribution caps that determine how much you can contribute to super in any one year without penalty.
It’s important you keep your financial planner informed about any contributions you make so they can ensure you don’t exceed the contribution limits. Contributions over the caps could result in a hefty tax bill.
When can you access your super?
The restrictions the government places on when you can withdraw your super are known as the ‘preservation rules’. These rules ensure your super balance remains inaccessible until you meet a condition of release, which may include reaching your preservation age and declaring retirement, turning 65 or suffering from a terminal medical condition.
Your preservation age will be between 55 and 60, depending on your date of birth.
How is super taxed?
Compared to other types of investments, super is a very tax effective investment over the long term.
If you make concessional (pre-tax) contributions to super, you will pay a contributions tax of just 15%. Personal non-concessional contributions made from your after-tax salary will not be taxed when they are contributed or withdrawn.
The income earned by your super fund is taxed at the concessional maximum rate of 15%. This is a big saving compared to the highest marginal tax rate you could pay for investment earnings outside super, which is currently 46.5% (including the Medicare levy).
The amount of tax you pay on your super when you withdraw it will depend on your age and whether you take the money as a lump sum or transfer it to a retirement income stream product, such as an allocated pension or annuity.
All super can be withdrawn tax free if you are aged 60 or over, whether you take it as a lump sum or withdraw it gradually through a retirement income stream. If you begin withdrawing your super before you turn 60, you will have to pay tax on it, although part of your super may be tax free.
What happens to your super when you die?
Many people wrongly assume that when they die their superannuation will automatically pass to their beneficiaries according to their will. In fact, this will only happen if your estate is the recipient of your superannuation death benefit. Legally, your superannuation fund can pay your death benefit to your spouse, any of your dependants or your estate at its discretion.
Many (although not all) superannuation funds enable you to avoid this situation by making what is known as a Binding Death Benefit Nomination. This is a written nomination made by you, which directs your superannuation fund on how to pay your death benefit.
If you are looking to maximize your retirement funds, Wealthwise can help you choose the super that fits your own personal financial situation.