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 Understanding Superannuation 

If there is one thing that people could do to start to understand and control their financial situation more, it would be take more ownership of their superannuation.  There are a number of reasons why people might hesitate to become more involved.  It might be because of the complexities of superannuation rules.  It might be because compulsory superannuation contributions have been around for 15 years.  Or it might be because employers often have more say than employees over where their money is invested.  Whatever it is, people don't seem to have grasped the potential of what superannuation can mean for them.  It is a crucial element in your personal financial situation and now, with choice of superannuation, you can start to take more control over your superannuation situation. 

 In this article I aim to explain what superannuation is, and why it is a key source of wealth for most people.   

To help develop an understanding of superannuation I have addressed the following topics in this chapter:

  • What is superannuation?
  • The key benefit of superannuation
  • The key disadvantage of superannuation
  • Making contributions to superannuation
  • Consolidating your superannuation
  • Insurance in superannuation
  • Investing your superannuation appropriately
  • The trend is your friend

 If you need further information the ATO has a great deal of information on superannuation rules.  This can be accessed through their website at www.ato.gov.au/super/ or through their Superannuation Infoline on 13 10 20.  As well as this you can get in touch with your own superannuation fund with any questions that you have about your super, how it is invested and the insurances that are available.

  • What is superannuation?

 Superannuation was introduced in the early 1990's as a low tax compulsory saving scheme for employees.  Each employer was required to pay into an approved superannuation fund a percentage of an employee's wage as a contribution.  Currently this contribution is 9% of an employee's wage. 

 This money is preserved until the employee reaches a certain age and retires from full time employment.  Originally this age was 55.  However it is now being slowly increased to age 60.  At this time the employer can either take their superannuation as a lump sum or as an income stream (pension).  There are particular tax advantages for taking superannuation as an income stream.

 Standard superannuation accounts are 'accumulation' accounts.  In this type of superannuation account the 9% contributions are put into a managed portfolio of investments.  If the value of the investments rises, the balance of the person's superannuation increases and vice versa.  In addition, every time a contribution is made on behalf of the person the balance of their superannuation increases. 

 Less common are 'defined benefit' type accounts.  These accounts have a final balance that is a multiple of the employee's final salary.  The multiple increases for every year of service.  For example, after four years of work a person might have a multiple of 0.5 times their final salary of $50,000, a total superannuation balance of $25,000.  After eight years of work their multiple of their salary might have increased to 1 times their salary, while their salary might have increased to $55,000, giving a total superannuation balance of $55,000.

 The key difference is that, with an accumulation account, a person's superannuation balance will increase or decrease based on investment returns.  With a defined benefit account, only a person's ending salary and length of service influence the ending balance.

  • The key benefit of superannuation

Superannuation has the benefit of contributing to 'forced savings', as employee contributions are mandatory.  More important than this is the fact that this investment occurs in a very low tax environment.

The 9% contribution from the employers is taxed at a rate of 15%, much less that the top marginal tax rate of 48.5% or the most common tax rate of 31.5%.  Furthermore, investment earnings in the superannuation fund are taxed at a top rate of 15%.  For most people this is less than the tax they would pay if they held investments in their own name.

  • The key disadvantage of superannuation

For people born after June 30 1964 superannuation benefits cannot be withdrawn until you have retired from employment and reached the age of 60.  There are conditions under which your benefits can be paid prior to then.  These include permanently incapacitated, severe hardship or death.  However, the general terms of release are that you must have reached the age of 60 and retired.  For those people born prior to the 30th of June 1964 the preservation age will be between 55 and 60 depending on their age.

The key disadvantage of superannuation is that you cannot access the money at will.  This is particularly important if you are young and can't really anticipate when you will need the funds in the future.  On that basis you need to be sure that, prior to making any additional contributions to superannuation, you are comfortable with not being able to access this money until you reach your preservation age and retire.  This explains why people tend to focus on building their superannuation balance through additional contributions closer to retirement, when they know that they will be able to access it sooner.

  • Making contributions to superannuation

The most common contribution that is made to superannuation is the 9% employer contributions.  In 2003/2004 employer contributions accounted for $38.7 billion of the $63.7 billion contributed to superannuation.  If you are between the ages of 18 and 70, employed and earning more than $450 per month you generally should be receiving employer contributions. 

Other common contributions include Government co contributions and salary sacrifice contributions, both of which are discussed in the following chapters.

A spouse contribution can be made for a spouse earning less than $13,800 a year.  In this case the spouse making the superannuation contribution may be able to claim an 18% tax offset for a superannuation contribution made on behalf of the low earning spouse.  The maximum level of the contribution is $3,000 and the maximum tax rebate is $540.  More information on this contribution is available at the superannuation section of the ATO website (www.ato.gov.au/super/)

Any person is able to make 'personal' contributions to superannuation at any time, up to the age of 65.  The contributions, made out of a person's own resources and where no tax deduction is claimed, are known as 'undeducted contributions'.  When these contributions are withdrawn from superannuation they are withdrawn tax free. 

You can even make contributions on behalf of a child - up to $3,000 per child for every three year period.  Of course, it will be a very long time before the child can access this investment!

  • Consolidating your Superannuation

By consolidating your superannuation, I mean putting it all into the one place so that it is easy for your to track it and watch it grow in size.  Also, putting all your superannuation into the one place may cut down on the level of fees you are paying, particularly if you find yourself with a number of small superannuation balances. 

One important point to remember when you are considering putting your superannuation into the one place is to consider your insurance situation.  With superannuation funds potentially being important to you in providing life insurance, you should check that you are not rolling out of a fund that offers good life insurance.  Also check if there are any fees involved in rolling out of a fund.  I recently came across a MLC fund that had an 18% exit fee.

The best way to roll out of a fund is to contact the fund itself, and ask for a form to roll over to another superannuation fund.  It is likely that they will require you to complete the form and send it back with some form of ID, as well as details of the fund you are rolling over into. 

If you have a choice of super options where you work, you can evaluate the various funds by considering the following factors:

  • Total fees
  • Life insurance availability
  • Investment options
  • Performance
  • Insurance in Superannuation

Most superannuation funds provide you with access to death insurance and income protection or salary continuance insurance that will pay a benefit for a period of two years in the event of sickness.  Often this insurance is quite reasonably priced.  If you are unhappy with the insurance options available in your superannuation fund, and you have choice of superannuation where you work, then it is worth researching other funds to see which may offer you better coverage in this regard.

  • Investing Your Superannuation Appropriately

Most superannuation funds have a variety of investment options available for you.  These options have different asset allocations and sometimes even different investment managers.  Usually the default fund is a 'balanced' fund.  Early on in your working life a more aggressive fund, with greater exposure to Australian and international shares, may suit you better.  It is worth checking where your superannuation assets are invested and considering if this is the most suitable option.

Choice of super may be available to you.  If so, it provides you with greater options to choose exactly where and how your superannuation is invested. 

  • The Trend is Your Friend

One aspect of superannuation that seems to concern people is that the rules governing superannuation seem to keep changing.  While I would agree that this is the case, it seems to me that recent changes have all favoured investors.  This makes sense to me, as the Government has a vested interest in seeing superannuation succeed and people fund their own retirement - rather than relying on a Government pension.

Recent changes that support this include: 

  • The introduction of superannuation splitting rules that will allow a couple to benefit from splitting contributions between themselves. 
  • The abolishment of the superannuation surcharge, which was an additional tax on contributions for high income earners.
  • Allowing people to take benefits in the form of an income stream, under some circumstances, prior to retirement
  • The introduction of 'Term Allocated Pensions' or 'Growth Pensions' to provide another option for ways income streams can be taken from superannuation assets.
  • The introduction of the Government Co contribution, that provides additional superannuation contributions for low income earners making personal superannuation contributions.

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