Superannuation is a highly beneficial system designed to assist you to reach financial independence for retirement. With more changes coming that will benefit everyone with super in Australia, I thought it was a good time to review its many benefits and outline the coming changes.
Superannuation acts as a long-term savings plan designed to provide an income in retirement. It has the following key benefits:
- Forced Savings – The Superannuation Guarantee Contribution is mandatory for all employees. In effect it forces all employees to save some of their income for retirement. This not only lessens the burden on government to fund pensions, which in turn improves our economy, it also allows for a lump sum benefit or pension to be paid to you at retirement.
- Tax effectiveness – The money you earn outside of superannuation can be taxed at very high rates, currently up to a maximum of 46.5%! However tax rates within superannuation are very attractive for most people. Super has two phases where tax is applied at different rates –
- Accumulation phase – when you are still accumulating money for retirement purposes the tax rate is just 15% on the income earnt, including capital gains. Tax on capitals gains for assets held longer than 12 months are discounted by a third, meaning a rate of as little as 10% on capital gains for assets held for the long term;
- Pension phase – when you drawing a pension income stream from your super fund, the tax rate applied internally within the fund is currently 0%.
- Choice of investments – Many people don’t realise it, but you do have a very wide choice of fund(s) you can use to invest your superannuation dollars in. The choice of investments range from shares in listed companies, bonds, cash, even collectibles and properties. Recent innovation in superannuation has lead to investors even being allowed to borrow and buy property within their own Self-Managed Superannuation Fund (commonly called an SMSF).
These things have all lead to many investors focussing their investment energies on accumulating superannuation. For some, superannuation is just a supplement to an ever growing investment portfolio. In any case it is a worth a serious look to see where the benefits can be secured for your future.
Are there any disadvantages to superannuation?
Superannuation does come with a few pitfalls to watch out for. For example:
- Preservation – funds invested in superannuation are preserved until you reach a "condition of release". Simply put this normally means reaching your "Preservation Age" (see below). Other ways to access your superannuation include disability, financial hardship and death.
- Strict rules on contribution limits – you can contribute extra to your super, but there are significant penalties if you contribute more than the allowable limits.
There are two broad types of contributions you can make into superannuation. These are:
- "Concessional" contributions, which include:
- Employer contributions (including contributions made under a salary sacrifice arrangement – which is where an employee exchanges take home pay for superannuation contributions which are taken out or "sacrificed" before income tax is calculated).
- Personal contributions claimed as a tax deduction by a self-employed person.
- "Non-concessional" contributions cap
Non-concessional contributions include personal contributions for which you do not claim an income tax deduction (ie no "concession".
Amount of cap
Note: the current legislation allows that if you are aged between 18 to 63 you can bring forward two future years of the above $150,000 contribution limit, thus allowing for a contribution of up to $450,000 of non-concessional contributions being made in any one year. It is extremely important to ensure this is actioned with care to ensure the limits are carefully managed when making large contributions to your fund in any one year, as penalties for a breach of the above caps are significant. We recommend seeking advice of a financial planner or accountant to ensure you are not running the risk of a breach.
Amount of cap
Note: many people use these above caps in setting their salary sacrifice amounts, however the caps are subject to change and also often include employer provided insurance held within super as part of the cap. This can mean you may inadvertantly breach your fund’s contribution limit for the year, which comes with a penalty of an increased tax rate (to the highest margin tax rate). This is a fairly common error made when calculating the amount being paid into superannuation when an employee wants to maximise their contributions. To avoid this it is always worth confirming your full entitlements from an employer and that prior contributions have not met/breached the above contribution cap. (We can assist with checking this for you, if you need.)
- "Concessional" contributions, which include:
Date of Birth
Before 1 July 1960
1 July 1960 – 30 June 1961
1 July 1961 – 30 June 1962
1 July 1962 – 30 June 1963
1 July 1963 – 30 June 1964
After 30 June 1964
Table: Your preservation age depends on your date of birth
Note that once you reach preservation age, where eligible, you can elect to start drawing a part pension from the monies in your super. This can reduce the tax internally within the super fund to 0%. This is also called a "Transition to Retirement" pension, which is basically drawing an income from super as a pension payment to assist in allowing for part time employment and/or increasing the tax effectiveness of the income earned by the member.
Compulsory superannuation rates for employees.
The government has proposed to gradually increase the levels of compulsory superannuation for employees so that all workers end up putting more money into their super. The chart below details the rates for what is called the "super guarantee charge percentage" and how they will increase year by year.
The super guarantee charge percentage (%)
Super guarantee rate (charge percentage)
1 July 2003 – 30 June 2013
1 July 2013 – 30 June 2014
1 July 2014 – 30 June 2015
1 July 2015 – 30 June 2016
1 July 2016 – 30 June 2017
1 July 2017 – 30 June 2018
1 July 2018 – 30 June 2019
1 July 2019 – 30 June 2020 and onwards
Reviewing investments is now more important!
The above increases in funds being directed into your super fund means you will have even more money to manage in your super, which places further importance on the investment risks you are taking with those monies. It is important therefore to ensure you understand what investments you have inside your superannuation and how these might behave in the long term. We recommend that at least once a year you should review what is happening within your super to ensure you have invested wisely in line with your goals and tolerance to risks.
The questions about our super we should all be confident to answer are:
- Can I increase my effective take-home income using super (where appropriate)? This can be achieved by reducing the tax you pay on your income outside super from as high as 46.5% to just 15% (a saving of up to 31.5%) Knowing how to do this through super contributions is a very effective tax minimisation strategy.
- Are you likely to have an adequate lump sum or pension for your retirement? Reviewing your projected balances regularly against the assets you hold in your super, can greatly improve your focus and outcomes, and can make a huge difference in the end.
- Is my super invested in alignment with my preferences? Regularly reviewing the assets held in your super helps to ensure you are investing in alignment with your goals and preferences. Super is a long term investment and there will be ups and downs, but ensuring your investments fit your needs can be great for peace of mind and dramatically improve your outcomes.
Should you wish to discuss how you can use your super to greater advantage or review your answers to the above questions, do not hesitate to call us to arrange a no obligation appointment with one of our experienced financial planners.