Superannuation
Superannuation Is Possibly
The Most Important Factor Of Wealth Creation
For many of us, the concept of superannuation is a little overwhelming, especially when we are relatively young. Retirement seems like a lifetime away so we tend to confine super to the ‘too hard’ basket.
As people continue to live longer and longer however, the need to provide for your retirement becomes extremely important. The earlier you start building a super fund, the more you reap the rewards in your twilight years. And let’s face it, after a lifetime of work, you deserve to be able to relax, knowing that your finances are in order. Your retirement savings grow as investments and are diversified in shares, property, fixed interest and cash. A distinct advantage of super is the fact that you receive favourable tax treatment, thus increasing the potential payout in retirement.
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How It Works
You can choose a superannuation fund from the many available on the market. Most are very similar in the way they are structured and operate, but it is always wise to seek expert advice before you make your decision.
Once established, your fund becomes an investment vehicle ideally suited to housing your retirement funds.
Contributions to your fund are made both by you and by your employer. You decide what your contribution should be but your employer is required by law to pay 11% (in 2024) of your salary/wages into your fund. This figure is set to rise in small, progressive steps to 12% by July 2025. If you do not select a super fund, employer contributions will be made into an authorised ‘MySuper’ product which is a simple fund with standardised fees and only one investment option.
The money building up in your super fund is invested on your behalf so it generates interest and the fund grows in value. There are strict rules governing when you can access the money in your super fund. These depend on your date of birth and, therefore, your current age. Most people cannot access their funds until they are at least 60 years of age.
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Types Of Superannuation
There are seven types of superannuation fund currently operating in Australia.
Industry Funds
Industry funds are operated by a group of employer associations or unions. They have no shareholders and so are run solely for the benefit of members.
Wholesale Master Trusts
Wholesale Master Trusts are also multi-employer funds but are operated by financial institutions.
Retail Master Trusts
Retail Master Trusts are individual super funds run by financial institutions. They are sometimes known as ‘wrap platforms.’
Employer Stand-alone Funds
Employer Stand-alone Funds are operated by employers for the benefit of their employees. Each fund has its own trust structure and conditions will vary from one employer to another.
Small APRA Funds
APRA is the Australian Prudential Regulation Authority which regulates the activities of banks, insurance companies and superannuation funds, credit unions, building societies and friendly societies. Small APRA Funds are set up for a small number of individuals – normally five or less – by an approved trustee. This is because none of the individuals concerned is able or willing to meet the requirements necessary to be a trustee of a self-managed super fund. (See below) The funds are regulated directly by APRA.
Self-Managed Superannuation Funds
(SMSFs) are the largest sector of the Australian superannuation industry. They are established for up to four people and regulated by the Australian Tax Office (ATO). Usually the trustees of the fund are its members but, in the case of a corporate SMSF, a company will nominate a corporate trustee and the members of the fund are directors of the company. Members of SMSFs can borrow against their fund, although there are restrictions. Some banks have launched SMSFs to allow members to borrow in order to acquire residential, commercial or industrial property.
Public Sector Employees Funds
Only apply to super funds set up by governments for the benefit of their employees.
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Growing Your Super
The primary function of any superannuation fund is to provide an ever-growing source of income through investments and contributions. A ‘growing your super’ strategy should form part of your overall financial plan. It will be designed to meet your personal needs and circumstances.
There are a number of ways in which you can grow your super more quickly.
You can make additional payments to your super fund. If you think your employer’s contribution is insufficient, you can increase the amount of your regular payments. As a rule of thumb, it is suggested that a contribution of around 12% of your salary over a period of 30 years is the minimum you will need*. But, make sure you can afford it before making a commitment.
Salary sacrificing is another option. This means you ask your employee to pay some of your pre-tax profit into your super fund rather than receive it as salary. The benefits of salary sacrifice include increased super, a reduction in income tax and no worries for you because your employer handles everything.
Government Co-contributions is another way to increase the amount of money in your super fund. The federal government will make additional contributions to the funds of those who make an after-tax contribution to their fund and who meet a number of strict criteria. The government will contribute $1 for every dollar you do, to a maximum of $1,000 per fund.
You may be able to make additional contributions to your spouse’s super fund especially if they are unemployed or in a low-income job. There can be tax benefits for the spouse making the contributions but, again, there are some conditions. You must be legally married, under 65 years of age (or between 65 and 70 and gainfully employed) and you must supply your spouse’s tax file number.
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The Importance Of Superannuation
Some people question the need for superannuation and believe it simply ties up money they might otherwise be able to spend. This is a very short-term view. It is important to realise that you might be in retirement for a very long time – up to 20 years or even more. The age pension for a single person is currently around $15,000 per annum*. You should compare the aged pension for a single person with your present salary. If you earn significantly more than that, you are in for a shock on the day you retire – certainly if you don’t have a brimming superannuation fund behind you.
Superannuation benefits form compound interest and long-term investment opportunities. Properly handled, it could end up being the largest asset you have – even bigger in value terms than your home.
There are tax incentives attached to super too which, over the years, will save you money. You can even hold insurance policies such as life, trauma and income protection within your super fund but it is wise to compare with independent insurance providers as there are pros and cons to both options.
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When’s The Best Time To Start?
The answer is, as soon as possible. Young people should talk to their first employer and make sure a superannuation fund is available to them right from the start. This often appears counter intuitive to those in their early twenties but the secret is this. The longer your money is in the fund – and the more you can add – the larger the sum available on retirement will be.
As people change jobs, they usually take their super fund with them. If, for some reason, you end up with more than one super fund, it may be advantageous to consolidate them into one. Choose the most appropriate fund and put the money from all the others into that one. It’ll make life easier, speed up the savings process and save you fees.
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Get Sound Advice
Superannuation may be essential but it can also be complicated and a little daunting. The financial planners at TAG Wealth are ideally placed to provide you with the best advice when choosing a super fund and will integrate the long-term operation of your super into a personal and comprehensive financial plan.
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Self-Managed Super Funds (SMSFs)
Self-Managed Super Funds or DIY Funds are small funds established for between one and four people who become members of the fund as well as trustees or directors. They are designed for those who want control over their superannuation assets and the ways in which they are invested. They might choose property, shares, fixed interest investments or a mixture of several options.
An SMSF offers a wide range of investment opportunities and should provide its members with absolute control and complete transparency. It is possible – though not always advisable – to borrow from an SMSF to purchase shares or property.
However, the set up costs can be high as too can the running costs, especially if members maintain low balances. Anti-detriment payments are not usually allowed and, of course, without an expert at the helm an SMSF usually requires at least one of its members to spend time on administration.
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TAG Financial Planning Pty Ltd ATF TAG Financial Planning Unit Trust ABN 64 647 048 794 t/a TAG Wealth Solutions a Corporate Authorised Representative of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL No. 236523 for financial services only.
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