Superannuation, or ‘Super’, is a way to save money for your retirement. Understanding how much you will need in retirement is important to understand. The benefits of super is the ability to hold a holistic range of investments like shares, property and cash. Superannuation is attractive because it receives favourable tax treatment, both when you are working and once you have retired. The government offers these tax savings to encourage you to build your retirement savings. Employers must typically pay superannuation contributions on behalf of their employees. You can also choose to add money into superannuation out of your own pocket. Self employed people may or may not have the option to contribute to super.
The tax benefits of super include:
The amount of money you will need in retirement varies from person to person, and depends on:
If you were to contribute just $20 a week into your super (after tax) for the next 30 years, your super account could end up $51,000* better off at retirement than someone who relies solely on their employer’s minimum contributions. That is more than enough to cover a year’s worth of retirement.
* The projections in this example are based on various assumptions, including but not limited to: Results show in today’s dollars, marginal tax rate of 34.5%, earnings rate of 7% p.a. after tax, inflation of 2.5%, no change in tax rates, no indexation of salary, no tax offset taken into account, no ongoing administrative fees included, does not take into account end benefit tax.
If you are an employee, your employer must typically pay superannuation contributions on your behalf. These contributions are called ‘Superannuation Guarantee’ (SG) and are compulsory for most employees. If you are eligible for superannuation guarantee, your employer’s compulsory contributions must be equivalent to at least 9.50% of your gross salary. For example, if you earn $40,000 a year, your employer must put at least $3,800 a year – or $950 per quarter – into your superannuation account. Some employers may contribute more into your superannuation, depending on the terms of your employment contract. If you are self-employed, you do not receive superannuation guarantee contributions but you can claim a tax deduction for personal contributions you make.
You can add your own pre-tax money to your employer’s contributions to increase your superannuation savings through ‘salary sacrifice’. The contributions are made by your employer who pays part of your salary into your super fund, instead of paying it to you. The amount you elect to sacrifice to super comes off your gross salary, reducing your take home pay, which can result in potential tax savings. This tax saving comes about because, for many people, the tax saved on a forgone salary exceeds the tax that is paid when the equivalent amount is contributed to superannuation. If your employer does not offer salary sacrifice, or you are selfemployed, you can still make personal contributions to super and claim a tax deduction. The contributions are then treated as before tax (concessional) contributions. You can also choose to make personal contributions to your super from your after-tax income, which may even attract a Government co-contribution, depending on how much you earn. It is also possible to contribute to your spouse or partner’s superannuation. This type of contribution may entitle you to a tax offset, depending on how much your spouse earns. This document contains general advice only. You need to consider with your financial planner, your investment objectives, financial situation and your particular needs prior to making any strategy or product decisions.
Contributions are generally broken down into two categories:
At present, the amount of all taxdeductible contributions that can be made in a financial year (without penalty) is $25,000. Concessional contributions over the cap will be taxed at your marginal tax rate less a 15% tax offset, plus an excess contributions charge (and interest charge, calculated by the ATO).
In the financial year the amount of all non tax-deductible contributions that can be made without penalty to super in any one year is $100,000. However, if you are under 65 years of age, two years’ worth of contributions can be brought forward to allow for a contribution of up to $300,000. Non tax-deductible contributions can only be made provided that the person’s total super balance (i.e. what you have in accumulation and pension phase) does not exceed $1.6 million.
When making contributions to your super fund, keep in mind that you can only transfer a maximum of $1.6 million into pension phase. Additional amounts will need to stay in an accumulation account or be withdrawn from super.
Generally, you can only access your super when you permanently retire from the workforce and also reach a minimum age set by law, called your ‘preservation age’. Other conditions of release apply, for example reaching age 65. Can you access your super and continue to work? If you have reached your preservation age, your fund can let you draw on your superannuation without having to retire permanently from the workforce. This means you could continue working part-time (or full-time) and use some of your superannuation, to supplement your income, instead of leaving the workforce altogether. If you choose to keep working, you will have to receive your superannuation as a particular type of pension. These ‘transition to retirement pensions’, provide you with a regular payment and cannot be cashed as a lump sum. However, if you select a transition to retirement allocated pension, you will be allowed to take a lump sum once you retire or reach 65 years of age. You can also stop the pension and put your benefits back into your superannuation fund (for example, if you decided to go back to full-time work and do not require the income from the pension).
Once you are eligible to access the money in your super fund, you need to consider the tax consequences. The amount of tax you pay depends on your age at the time of the withdrawal, the amount you take out and the super component from which the withdrawal is taken.
A self-managed superannuation fund (SMSF) has the same purpose as other super funds – to provide retirement benefits for its members.
Perhaps the main difference between SMSFs and other types of super funds is the control of the fund. All super funds are controlled by a trustee, but in the case of industry funds, employer funds or personal funds the trustee is an institution or large entity, such as a company. With an SMSF the trustees are the members of the fund. Perhaps the most influential difference with an SMSF is that you have greater control over the investment of your super savings. This is because you are making the investment decisions.
An SMSF is not for everyone. It provides additional control to its members but it is important to remember that with additional control comes added responsibility.
An SMSF is only appropriate if you have the time, the desire and the expertise to manage your super affairs correctly