We’ve all heard of it, we know we have some (probably more than one fund) but do we really know everything we should about our super?
Here at Financial Framework, we say that often because we want to remind people of that. Just because you can’t access it right now, doesn’t mean you shouldn’t be taking an active role in your retirement savings. Let’s talk about some of the basics of super.
Basically, superannuation is your retirement savings.
On a more technical note, it is a long-term, tax-effective investment to help you prepare for retirement.
Since the super guarantee (SG) came into effect in 1992, your employer is required to put a percentage of your salary into your super fund. There are options for you to add more money to your super fund, we discuss these below.
Your employer is obliged to pay the super guarantee if you meet the following conditions:
Superannuation is designed to help you fund the retirement you want. You may be able to access the Age Pension however, most will find this is not sufficient.
Building your superannuation during your working life means you can retire with the lifestyle you want. There are several strategies you can use to help build up your super.
It’s also a tax-effective investment. Payments into super are taxed at 15% (or 30% if you earn over $250,000) rather than at your marginal tax rate.
Other benefits include personal insurances such as Life, Total and Permanent Disability, and Income Protection. You may find some superannuation funds that will offer these at a standard level. The benefit here is that there is usually no requirement to go through medical assessments to determine your eligibility for insurance. We recommend ensuring you have the right level of insurance cover to meet your personal needs.
On top of all that, your money is secure. The funds are subject to market highs and lows, but there is a government guarantee for up to $250,000 for authorised deposit-taking funds. And because generally, you can’t access the funds, you won’t be tempted to steal from your savings for that holiday or car repairs.
As of 1st July 2021, your employer must pay 10% of your pre-tax salary into your super.
The money in your super is invested in a variety of investment options such as bonds, shares, property, and fixed interest. Your super fund will choose which companies they invest in however, you have a choice over how the money is invested.
This should align with your risk profile. For example, if you are a conservative investor and worried about the loss you may be invested in a low-risk investment. If you’re a risk-taker and don’t mind a bit of volatility you would probably be in a high-risk investment. Timing is also a factor to consider.
You can also choose your super fund, we find a lot of people will go with the fund their employer recommends. This may not always be the option for you. Things to consider are the fees, investment choice options, and insurance options as well as the overall performance of the fund.
Over time, your super will grow through continuous payments from your employer, the reinvestment of dividends (the profits the individual shares make) as well as the growth (success) of the companies you’re invested in.
You can also make your own contributions.
A concessional contribution is usually done by salary sacrifice. This is where you contact your employer and ask them to make extra payments to your super out of your pre-tax salary. Payments made this way incur only the 15% super tax (30% if you earn over $250,000). This may leave your salary a little short but may pay off in the long term.
You can do this on a regular basis, or as a one-off.
If you want to add money from your savings, the sale of an asset, or an inheritance to your super, you can do this as a Non-Concessional Contribution.
You should check with your super fund, or your adviser before you make the payment to make sure they will accept this contribution. You may be able to do this with the benefit of a tax deduction.
If you want to claim the tax deduction (you don’t have to) you’ll need to complete a Notice of Intent to claim or vary a deduction for personal contributions form and receive an acknowledgment of this before you complete your tax return for the financial year.
You’ll need to be mindful of the limits (also known as caps) on contributions, if you exceed the cap you may incur financial penalties. There are some exceptions to the caps for those eligible.
If your spouse is earning less than $37,000 per year, you can contribute up to $3,000 (after tax) to your spouse’s super fund and you may be able to claim a tax offset.
If you’re earning less than $56,112 and make an after-tax contribution to your super, the government will pay a co-contribution into your super. The maximum amount they will pay is $500 and payment will depend on your income.
Currently, the cap on concessional contributions is $27,500. This includes both your employer super guarantee payments and any non-concessional payments you make such as salary sacrifice.
The non-concessional contribution is $110,000.
Unless you experience financial hardship or other early release conditions, you can access your super when you reach your preservation age.
Once you’ve reached your preservation age, you can reduce your working hours and supplement your income by receiving a pension. And, as you’re still working, you’ll continue to build your super with the SG payments from your employer.
Other benefits include paying less tax and easing yourself into retirement. The downside is that you’re drawing down on your super and possibly reducing the money available for retirement.
With all of the above, it may appear that super is not that basic after all! However, with a few simple steps and checking in on your super strategy every now and then, you should be able to use your super to fund the retirement lifestyle you want.
Step 1 – Make sure your employer is paying your super guarantee payments
Step 2 – Talk to your adviser and make sure you have a super fund that meets your needs and consider whether consolidating your super funds is right for you
Step 3 – Make sure your super is invested in the right option for your risk profile
Step 4 – Check out our blog on the strategies you should consider at each stage of your life
It is very important that you understand that the information above is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. It is also worth noting that the Australian financial and taxation system is ever-changing, and the information above may no longer be relevant. Again, we suggest seeking professional advice from a financial adviser before proceeding.