What is Superannuation?
Superannuation, or ‘super’, is a way to save money for your future. It is important to understand how much super you’ll need, and how to best manage the money for your retirement. Through super, you can hold a wide range of investments such as 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 super assets. 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. If you are self-employed, you can choose whether to contribute to superannuation.
How much super will you need?
The amount of money you will need in retirement varies from person to person, and depends on:
the kind of lifestyle you want
other income options in retirement (such as part-time work or payments from other investments) that will supplement your super, and
the age at which you would like to retire
The sooner you start, the better
If you were to contribute just $25 a week into your super (after tax) for the next 30 years, your super account could end up $50,000* better off at retirement than someone who relies solely on their employer’s minimum contributions. That’s more than enough to cover a year’s worth of retirement.
*The projections in this example are based on various assumptions
How can you invest in superannuation?
You invest into super by contributing money into a super fund. Contributions can be made by you, your spouse, or your employer. There are a wide range of super funds to suit your individual needs, and we can help determine which one is right for you.
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. These contributions must be equivalent to at least 9.50% of your gross salary. If you are self-employed, you do not receive superannuation guarantee contributions but you may be eligible to claim a tax deduction for personal contributions.
You can add your own money to your employer’s contributions to increase your superannuation savings through ‘salary sacrifice’. The contribution is made by your employer who pays part of your salary to your super fund, instead of paying it to you. The amount you elect to sacrifice to super comes off your gross salary, and may result in a tax saving. 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.
How are super contributions typically taxed?
1. Concessional Contributions (taxdeductible). Tax of 15% will be deducted from the contribution as it enters the fund. The types of concessional contributions include SG, salary sacrifice, personal deductible etc. The amount of tax-deductible contributions that can be made in the 15/16 FY depends on your age. If you were:
Under age 49 at the end of the 2014/15 FY: the cap is $30,000.
Age 49 or over at the end of the 2014/15 FY: the cap is $35,000.
2. Non-Concessional Contributions (non tax-deductible). No tax is deducted from the contribution, provided they are within the specified limit. The amount of non tax-deductible contributions that can be made without penalty to super in any one year is $180,000. However, if you are under age 65, this can be averaged over three years to allow for a contribution of up to $540,000.
When can you access your 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, e.g. reaching age 65.
Once you can access your super benefits, you need to consider the tax consequences associated with accessing your money. 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.
Managing your own super fund
A self-managed superannuation fund (SMSF) has the same purpose as other super funds – to provide retirement benefits for its members. How is an SMSF different? Perhaps the main difference between a 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. Would an SMSF suit you? An SMSF is not for everyone. It provides additional control to its members, but it is important to remember that with the additional control comes added responsibility.