What is superannuation
Superannuation is money that is set aside over your lifetime to provide for your retirement. For most people, superannuation begins when you start work and your employer starts paying super for you. You can also help to build your super by adding your own contributions
A brief history of super
Super funds first appeared in Australia in the 1850′s as a way to help workers build wealth for their retirement. Super at the time was optional and over the next 140 years it became more popular.
In 1992 the government realised that many Australians still weren’t saving enough for their retirement and that many people were relying on the government pension to provide for them in their retirement, so the government passed laws to make super more attractive.
Today almost everyone has money saved in a super fund and together Australians have saved over $1 trillion for their retirement.
Here are some facts about how superannuation works.
Putting money into your super while you’re working
Money goes into your super fund in the form of contributions. These can come from the following sources:
- Employer contributions – when your employer contributes a minimum of 9% of your salary to your super on your behalf
- Personal contributions – when you make extra contributions to your super in either of the following ways:
- Before-tax contributions, such as salary sacrifice (known as ‘concessional’ contributions)
- Personal after-tax contributions (known as ‘non-concessional’ contributions).
Super investments are based on sound principles
Some people may say that super is a bit like a lottery, however super investments are actually based on very sound and time proven principles to reduce the risks, including:
- ‘Time in the market, not timing the market’. Investments are more likely to grow by being invested over a long time than by trying to pick when to buy or sell. Your fund does not try to pick times to buy and sell, but rather tries to pick healthy investments and to stay invested over a long time.
- ‘Start early and invest regularly’. Super funds allow you to invest your savings early on in life and to invest monthly. This means your investments have time to grow through the compounding effect and by investing a little bit every month you also smooth out the market’s ups and downs.
- ‘Diversification’. Funds spread your investments across different types of investments, in different industries and countries, to avoid ‘putting all your eggs in one basket’.
The money you put aside into super is invested by the fund. So not only are you accumulating savings, your money is being put to work to earn more money. Super funds invest in various areas including companies that pay dividends, commercial real estate earning rent, or infrastructure like roads and airports that earn fees. These investments may grow in value and earn you profits, increasing your savings further.
The power of ‘compounding’
Every year that your savings are invested and earn money, the profits are put straight back into your account and are reinvested, in turn potentially earning you more profits the next year. This cycle is called ‘compounding’ and over time it makes your savings grow even faster.
Investment options
You can control where your super fund invests your money by selecting what is called an ‘investment option’. Investment options allow you to vary your investment risks and returns. Some investment options include bank deposits that have low rates of return, but are also lower risk, meaning they are less likely to fluctuate or go down significantly. Other investment options, like shares in a company, are higher risk, but can potentially provide you with higher rates of return.
If you are considering shifting into a lower risk investment option, first think about your long-term strategy, your investment time-frame, and the implications of moving your money. Getting advice from a qualified expert is always a good idea.
Salary sacrificing
Salary sacrificing means sacrificing an additional part of your salary – on top of the required 9% – into your super. Many people do this to increase their savings.
Salary sacrificing may be an effective way to save regardless of the economic environment because of the low tax. Also, as the value of shares goes down you may be able to purchase more shares for the same amount of money. Historically, the value of shares purchased in a market downturn can increase faster in future.
Government taxes on contributions
It is important to note there are limits on how much you can contribute to your super.
Before-tax contributions (‘concessional’ contributions)
Your employer contributions (also including any salary sacrifice contributions you might make) will be limited to $25,000 per year if you are under 50 years of age. If you’re 50 years old or over, the concessional contributions cap is $50,000 (not indexed) for the 2009-10, 2010-11 and 2011-12 financial years. This is a transitional measure.
Contributions up to the concessional contribution limit are currently taxed at 15% when paid to your superannuation fund. If you exceed these limits, additional tax applies.
After-tax contributions (‘non-concessional’ contributions)
Non-concessional contributions are generally the ‘after-tax’ contributions you make to a super fund and are not included in the fund’s assessable income. Non-concessional contributions include personal contributions you make to super from:
- Your take-home (or after-tax) pay, or your savings, for which you aren’t allowed a personal super deduction in your income tax return
- Profits from your business or from selling an asset
- An inheritance you receive
- Amounts you transferred from a foreign super fund that do not count towards your Australian fund’s assessable income.
The non-concessional contributions cap is six times the amount of the concessional contributions cap, which is indexed each year. In 2010-11 the non-concessional contributions cap is $150,000.
Other factors to consider
Give your fund a ‘health check’
- Regularly check the long-term performance of your chosen fund against other funds. A good way to find out this maybe by checking your fund’s returns performance over a five to seven year period. Super is a long-term investment and one-year returns are not a valid measure of your fund’s performance.
- Fees can make a big difference to your end super benefit so it’s a good idea to check fees and assess whether your fund is competitive.
- If you hold more than one super fund account, consider the merits of maintaining all of them as separate accounts. If you are unsure of the super accounts you currently have active you could access the Australian Taxation Office’s ‘Superseeker’ service. Visit www.ato.gov.au/superseeker or phone 13 28 65.
- Make sure your fund has your Tax File Number or there is a risk that all employer contributions, including salary sacrifice, will be levied tax at the highest marginal rate of 45 per cent. If you’re not sure if your fund has it, check your most recent super statement or contact your super fund.
- Investigate if your contribution levels will give you enough in retirement. The Australian Securities & Investments Commission’s (ASIC) MoneySmart website and websites of many super funds/providers now have super calculators to help people work out if their current super contribution level is enough to help them achieve the lump sum or annual income they desire in retirement.
- Consider some opportunities that may boost your account, including salary sacrificing, or your eligibility for the Government’s co-contribution scheme. You can find out more about the co-contribution scheme by visiting http://www.ato.gov.au/individuals
A good place to find out more about your super fund, other funds and general information about how super works in Australia, is at ASIC’s MoneySmart website at www.moneysmart.gov.au, which helps people make smart choices about their personal finances. You can also download a free copy of the booklet ‘Super decisions’ from www.moneysmart.gov.au.
Accessing your super
You can access your super when you reach your preservation age and retire, or when you turn 65 (even if you haven’t retired).
When you are eligible to access your super, you can take it all out and use at your discretion – hopefully to pay for your retirement years, or you might leave some of it in super to potentially continue growing through investments and draw an income from it. Someone in retirement can actually keep their money invested for another 20-25 years.
The choice is yours, but before deciding you might like to speak to a qualified expert, like an accountant or financial adviser.
No tax on benefits taken after you turn 60 ( except non taxed funds)
No matter how you take your super benefit once you retire (i.e. regardless of whether you take it as a lump sum or a pension), you can withdraw the money tax free. Note that if you take your benefit before you reach age 60, your super benefits are likely to be subject to tax – although how much you pay depends on a number of factors. Before accessing your super benefits, prior to reaching age 60, seek expert advice about your retirement options, which may help to reduce your tax.
For more information
This document is only a summary of some of Australia’s super system and is intended as general information only. It is not intended to be a substitute for professional advice. The information in this document may or may not affect you, depending on your financial circumstances. If you’d like to find out more, try the following reference points for assistance:
- Contact your super fund and find out if they have any more information that may be of assistance
- Visit the Australian Tax Office website: www.ato.gov.au/super
- Contact an independent financial counsellor or financial adviser, who will be able to look at your individual financial situation
