What you'll learn in this step: Having a good super plan will help set
you up for a comfortable lifestyle in retirement.
Superannuation is a means of saving for your retirement with the added bonus
of tax concessions. It is not an asset class like shares or property but rather
a vehicle offering tax breaks when you invest in these assets. If you organise
your superannuation properly, you should be able to enjoy life after you stop
working.
In times gone by, people could expect to live only a handful of years after
they retired and their bank savings supplemented by the pension were probably
sufficient to see them through. But with people now living 20 or 30 years in
retirement, there is a greater need to ensure sufficient funds are available
to last for the long haul. Statistics show that if you take a couple aged 65,
one of them has a one-in-three chance of reaching 100. That's a lot of years
to provide for.
How much do I need?
According to government estimates, you need to save 12 per cent of your annual
income for the 40 years of your working life to give yourself an income equal
to 40 per cent of your pre-retirement salary. And most of us want at least 60
per cent. So if you earn $50,000 now, a starting point might be to think of
a retirement income of about $30,000 a year.
Without tax breaks and compulsory contributions from employers, few would have
enough retirement income to ensure an adequate lifestyle. While you usually
don't spend as much in retirement – no commuting, no office clothes, no school
fees, probably no mortgage – you still want money in order to enjoy all those
extra hours you have on your hands. Going out for dinner, enjoying the theatre,
joining clubs and travel may constitute your retirement lifestyle. But these
things cost money.
If you fail to save enough for your retirement, there will always be a government
pension, but that may not deliver the life you want to lead.
Learn
more: Work out how much I
should be putting away in super, Sydney Morning Herald, 31 May 2000
There is no simple formula. But experts say the sooner you start to think
about your retirement expectations, the better.
Who can contribute to super?
If you are in the workforce and aged under 70, you are entitled to contribute
to a superannuation fund. There are also other circumstances under which you
can contribute:
If you have worked for at least 10 hours a week for the past two years.
If you are on parental leave and were in a super fund before this leave and have been out of the workforce for less than seven years.
If you have had to stop work because of physical or mental ill health.
If you are a non-working or low-income (less than $13,800pa) spouse, your
partner can contribute up to $3,000 a year to your super fund.
If you are in receipt of the Baby Bonus.
People aged over 70 who are employed full time (more than 30 hours per week) can now make personal contributions (contributions made out of after tax income).
Learn
more: Oh, baby, Sydney Morning Herald, 31 July 2002
The strategy: To put my baby bonus into super.
Cooling off period
If you choose your own super fund or a retirement savings account, you have
14 days from the date of acceptance of your application to change your mind.
Is my employer paying the correct amount?
If you are between the ages of 18 to 70 and paid $450 or more in a month your
employer generally should be contributing to your superannuation. This applies
for full time, part-time and casual employees. If you are paid under an award
it may state that your employer must contribute even if you earn less than $450
a month.
At present your employer contributes 9 per cent of your salary. Some employers pay the 9 per cent on your total salary
package while others pay just a percentage of the cash component. Both are acceptable.
If
your employer has not been providing for your super, you can report them to
the Australian Taxation Office. The penalties for not contributing are much
higher than the upfront contributions.
From 1 July 2003 employers must pay their employee's Superannuation Guarantee (SG) contributions at least every quarter. Your employer must inform you in writing the amount of SG contributions made on your behalf.
What can I do if my employer has not made my super payments?
Talk to your employer. Call the Australian Taxation Office Superannuation Helpline
on 131 020. If you are a member of a fund but no payments have been made, contact
your fund.
Can I add more money to my super?
Yes, but there is a limit to the amount you can contribute, determined by your age if you are making a salary sacrifice contribution. There is no limit if it is from your after-tax income (see undeducted contributions in Step 4). Salary sacrificing offers you some tax breaks. Instead of the money being taxed at your marginal rate of up to 47 per cent you only pay a 15 per cent contribution tax. And into the bargain, you will also end up paying less income tax overall because the money you have salary sacrificed into your super is taken out of your salary before the tax is calculated..
In certain circumstances super contributions will be subject to the superannuation contributions Surcharge, which may be up to 15% of the contribution.
Learn
more: Time running out for boomers, The
Sydney Morning Herald, 5 Nov 2001
The post-war generation is ill-prepared for retirement, writes Felicity Robinson.
Case study
Van, a financial controller, and Celina are both aged 45 and have two teenage children. They want to maintain their present lifestyle when they retire.
Read the full case study
What you'll learn in this step: An explanation of the different types
of fund and what you should look for in one.
Where does my super money go?
The money goes into a trust structure that then invests in assets such as shares,
property, fixed interest and cash. Most superannuation funds allow you to choose
the mix of your investments. The offerings are generally split into growth,
balanced and conservative portfolios. Growth carries the highest risk and potentially
highest returns, while conservative funds have the lowest risk and more stable
lower returns.
Learn
more: Do you know where your superannuation
fund is investing your money?, The Age, 26 March 2001
Is it in tobacco, gambling, alcohol or arms? The chief executive of the Australian
Consumers' Association says most people don't know and are often shocked by
the answer.
Learn
more: Why it's still not your choice, The Age, 2 Sept 2002
Putting your super where you want is still a distant dream, writes Christine Long.
Different funds
There are more than 240,000 superannuation funds in Australia, however more than 230,000 of these are DIY funds with fewer than 5 members. Each fund's trustees are responsible
for investing the money on your behalf. Some companies have their own super
schemes, some are part of industry schemes while others contribute to a scheme
run by the major banks and life insurance offices. You can also put your money
in retirement savings accounts (RSA) with the major finance houses, and they
will offer the same tax incentives as a super fund. While RSAs guarantee the
capital this does not mean RSAs are better than a super fund. They are just
an alternative for the conservative investor.
Learn
more: The new masters, The Sydney Morning
Herald, 27 Feb 2002
Superannuation investment fees are too high. Are master trusts to blame and
are investors getting locked into them? John Collett reports.
Company funds
Company funds are run by major corporates and government bodies. They can have
advantages such as offering to match any additional funds to your superannuation
but often they attract higher fees. Another drawback is that you may have to
change your super fund if you leave the company.
Industry funds
Industry funds allow some portability from one job to the next, although this
may not matter if you change industries. However, many now offer public access,
so you don't have to be a member of the industry to join the fund. The Government
has tried for a number of years to introduce choice of superannuation fund for
employees but to date has been unsuccessful. Choice of fund basically means
you may be able to switch out of your existing fund into another one if you
believe it is not performing well. The main demand from people however, has
been the right to choose the investment mix within the fund.
DIY funds
You can choose to have your own self-managed fund where you decide what you
will invest in. This is a complex task and shouldn't be taken lightly, although
if you do it well, the rewards may be significant. However, there are reasonably
hefty costs involved that may end up equalling the management fees of a regular
fund. It is foolish to consider a DIY fund unless you have at least $100,000
to invest. The fund will cost at least $1,500 to set up and $1,000 in running
costs each year – accountant fees, audit fees, APRA (Australian Prudential Regulation
Authority) or ATO lodgement fees. For further information on DIY funds go to the ATO's self-managed super fund section or the Association of Superannuation Funds of Australia.
Get
advice before managing your own super fund because there are many restrictions.
Learn
more: Over your dead body , Sydney Morning Herald,
10 July 2002
A DIY super fund will let you control your estate from beyond the grave, reports Leeanne Bland.
Learn
more: Manage your own super, Sydney Morning Herald,
20 Nov 2002
The strategy: to look after my own super.
Learn
more: Super savers, Sydney Morning Herald,
7 Aug 2002
The little-known retirement savings account provides another avenue for your superannuation, reports Christine Long.
Types of funds
There are basically two types of superannuation fund: defined benefits and
accumulation. It's important that you know the type of fund your money is in,
although the vast majority these days are accumulation funds.
Defined benefits fund
With a defined benefits fund, the performance of the investments does not matter
to you because when you come to retire you will receive a specified amount.
This figure is usually calculated by applying a formula which is generally a
multiple of your final salary and the number of years you have been with the
company. If you retire early, the amount may be discounted. If the balance of
your fund is below the defined amount, your employer picks up the tab. If the
balance is higher, your employer pockets the difference. While there is some
concern about the employer being a possible winner at your expense, it's important
to remember that they have taken the risk. In some cases, this situation will
not arise as defined benefits are paid from current revenue with no superannuation
fund as such existing.
Accumulation fund
If you have an accumulation fund, you need to keep track of how well the fund is performing. Whatever the balance is at your time of retirement is what you will receive. That's because the balance is your total contributions (personal and employer) plus returns on your investment minus management costs. If you are in a poorly performing fund, you will be a lot worse off than somebody in a high performing fund. The end result will also depend on the types of investments the fund makes. Some may focus on shares with higher risks but potentially higher returns, while others may focus on more stable investments but with lower returns such as fixed interest.
What if I have money in different funds?
The tax office has a register of lost members for people who have lost contact
with their benefits. It's called the Lost Members Register. To find out if you
have a lost benefit call the Super Reporting Helpline on 13 10 20.
Lost
your super, or has your fund lost track of you? You can check at Find
My Super.
Learn
more: Free money , Sydney
Morning Herald, 27 Nov 2002
The strategy: to find lots of lost loot.
What you'll learn in this step: Understand the risk associated with
your superannuation and make informed decisions about performance and contributions.
Investment risk
Superannuation is a vehicle for investment. As such, the choices you make on the
types of investment all come down to your personal risk profile and your time
horizon. If you are only three years off retirement, you are likely to opt for
more conservative investments than somebody in their 20s with many years ahead
in the workforce.
The four major types of funds are:
Capital guaranteed: low-risk investing only in deposits with such
institutions as banks, building societies and so on. This fund promises the
capital and accumulated earnings will not be reduced by losses.
Capital stable: low risk, low return although not quite as secure
as capital guaranteed as your capital can be reduced by investment losses.
Invests in fixed interest and cash.
Balanced: a combination of shares, property, fixed interest and cash.
You can usually fine-tune the balance to suit your risk profile.
Growth: investment in shares and property. At the higher risk end
of the investment scale. Suitable for those investing for the long term.
What are the fees?
Super funds charge fees for administering your account. Ask if you are being
charged a flat fee or a percentage of your account. As well as the administrative
fees you may also be charged entry fees, ongoing fees for the funds management,
switching fees if you change between accounts and exit fees.
The
higher your fees, the greater your returns will need to be to compensate for
the extra costs.
Within your fees are sometimes commissions to financial planners for recommending
a particular product. An upfront commission will come out of your entry fee,
while ongoing or trailing commissions will be part of your annual fees. Some
financial advisers charge for the consultation rather than receive a commission
so ensure you know how they charge.
How do I check the fund's performance?
You get a statement from your super fund each year that will show how it has
performed. To check how it has performed, there are a number of measures to
compare it with. If you are in a growth fund specialising in Australian shares,
for example, check its performance against that of the All Ordinaries index.
But don't panic if it has had a bad year. After all, superannuation is a long-term
investment. You need to monitor performance over a three-to-five year period
rather than on an annual basis. If, however, your fund has performed poorly
for several years, you might consider switching funds or the type of investment.
Don't forget, however, there will probably be switching fees.
Learn
more: Supercharged , Sydney
Morning Herald, 27 Nov 2002
What can you do to speed up the growth of your retirement nest egg? Annette Sampson has plenty of suggestions.
Who's watching the fund's trustees?
The Superannuation Industry (Supervision) Act 1993 sets the legal framework
which governs how trustees should manage super funds. Basically they need to
keep accurate records, implement an investment strategy and keep members informed
about the fund.
Extra cover
Some superannuation funds offer life cover, disability cover and in some cases
cover for being retrenched. Check whether your particular fund offers these
as often it is a cost-effective way to purchase insurance.
The
National Information Centre on Retirement Investment
is a free, independent, confidential service devoted to improving the level
and quality of investment information provided to people with modest savings
who are investing for retirement or facing redundancy.
Case study
Ben and Antoinette have been married for 18 years and have no children. "We are going into panic mode," Antoinette says, "as we feel we are quite behind with our real estate, superannuation, investments and a retirement plan.
Read the full case study
What you'll learn in this step: Take advantage of the super tax breaks
available.
Superannuation offers some good tax concessions – ostensibly set up to encourage
you to save for your retirement. In most cases your investments are better off
in the superannuation environment because the tax treatment is so favourable.
However, that doesn't mean all your savings should be ploughed into superannuation.
Much will depend on where you are in your life.
In your 20s you would be foolish to lock up all your savings in super until
you are 60. At some stage you will want to buy a house and maybe raise a family,
so you need to have some investments you can access. And who knows what changes
may be made to superannuation laws in the meantime.
In your 40s, superannuation starts to appear a more favourable option, but
if you still owe money on your home it might be wise to spend your savings on
clearing your mortgage rather than putting it all into super.
Once you get within 10 years of retirement age, the superannuation environment
is where most of your money should be headed unless you are going to exceed
your reasonable benefits limits.
Learn
more: Increase the tax-free component of my
super, The Sydney Morning Herald, 26 Sept 2001
The bad news is this strategy won't work for everyone, and if you started
contributing to super after July 1, 1983 you might as well stop reading now.
Taxing super
Superannuation contributions are taxed at 15 per cent on the way into the
fund, and superannuation fund earnings are also taxed at 15 per cent. If you
take your end superannuation benefit as a lump sum, a further tax may be applied,
depending on the size of the benefit and on your circumstances.
In addition, if you are deemed to be a high-income earner, your superannuation
contributions will be hit by a further 15 per cent tax.
There are three taxes that apply to super:
A contributions tax.
A tax on earnings.
A tax on withdrawal.
Contributions tax
If the money paid into your super has not already been taxed, it will attract
a 15 per cent tax on the way into the fund. For the 2002-03 financial year,
if you are earning more than $90,527 a surcharge is levied over and above the
15 per cent. This surcharge can climb to a maximum of 30 per cent if your income
is $109,924 or more. There is no contributions tax if your money has already
been taxed (see undeducted contributions below).
Tax on earnings
The money you earn on your investments within the superannuation fund will
be taxed at a maximum 15 per cent. The figure could be lower if you take into
account franking credits.
Tax on withdrawal
If the money in your super was taxed at the concessional rate on the way in,
there may be some tax to pay when you cash in your benefits – that is, when
you receive your eligible termination payment. Super contributed before 1983
is treated differently. For the pre-1983 component of your eligible termination
pay, you will receive 95 per cent of that sum tax-free and then be taxed at
your marginal rate on the 5 per cent balance. You will pay no tax on the first
$112,405 of your post-1983 component and then 15 per cent on the balance as
long as you are aged more than 55. If you are under 55 you will pay 20 per cent
plus a Medicare levy on every dollar. You won't pay any tax on your undeducted
contributions. But if you exceed the reasonable benefit limits (RBL) you will
pay the top marginal rate of tax.
Reasonable Benefit Limits
Recognising the favourable tax treatment on superannuation, the Federal Government
moved to put a cap on how much money you can accumulate in super to stop high-income
earners ploughing all their money into the tax-favourable environment. As a
result, it introduced the reasonable benefit limits (RBL), the maximum amount
you can accumulate in your super without attracting the top marginal tax rate
on withdrawal. The sum is indexed and moves up each year – in 2002-03 it is
$562,195 if you take the money as a lump sum and $1,124,384 if you opt for a
complying pension or annuity with at least 50 per cent of your benefit. The
Government wants to encourage people to opt for pensions or annuities rather
than a lump sum, hence the difference in the RBL.
Excess benefits
Once you go over the RBL, your benefit will be taxed at the top marginal tax
rate plus the 1.5 per cent Medicare levy if taken as a lump sum. Splitting your
super contributions between you and your spouse may be one way around this problem.
(See spouse contributions below.) If you think you are in danger of exceeding
your RBL, seek financial planning or taxation advice.
Undeducted contributions
If you choose, you can make additional contributions to your super from your
after-tax earnings. Because you have already paid tax, there is no contributions
tax on the way into the super and no tax when you withdraw the benefits. And
the good news is that you will have enjoyed a tax rate of just 15 per cent on
your earnings while the money has been in the super environment. But if you
take this money as a lump sum, the normal withdrawal taxes will apply.
Learn
more: Super relief on roll-over, The Sydney
Morning Herald, 6 Mar 2002
Redundancy need not be the end of the world, if you handle your payout wisely.
Learn
more: A measured sacrifice, The Sydney
Morning Herald, 27 feb 2002
Salary sacrifice remains a popular option for wage and salary earners attempting
to cut their income tax bill and building up those huge retirement sums we
are constantly told we need for a financially comfortable retirement.
Because
you are only paying up to 15 per cent tax on the earnings from your super, this
means more money is reinvested each year. The benefits of compounding can make
a huge difference to your final payout.
Spouse super contributions
Taxpayers can claim an 18 per cent tax rebate on superannuation contributions
of up to $3000 made on behalf of their low income or non-working spouse. The
maximum rebate allowed is $540. To be eligible to claim the rebate your spouse
must be receiving $10,800 or less in assessable income a year, although a reduced
rebate is payable for spouses earning up to $13,800 assessable income per annum.
You can contribute more than $3000 into your spouse’s super if you wish.
The Federal Government is proposing to replace this with a co-contribution from July 2003.
Self-employed
If you are a sole trader or in a partnership, you can claim full tax deductions
on contributions up to $5,000 and 75 per cent on amounts over this level, subject
to age limits.
What you'll learn in this step: How should you take your super?
When can I access my super?
Generally, most of your superannuation contributions must be held in a superannuation
fund or RSA until your earliest retirement age, which is at least 55. If you
were born after 1965, you will need to be aged 60 before you can access it.
This money is often called your preserved benefit. Some people may have unpreserved
benefits that can be paid out before this earliest retirement age.
The benefit may be taken as a lump sum, an allocated pension, a lifetime pension
that complies with the pension reasonable benefit limits (RBL) entitlement or
one that doesn't. It could be a life expectancy pension or a term pension that
complies with the pension RBL or one that doesn't.
Learn
more: Raiding my super, The Sydney Morning
Herald, 27 Feb 2002
The strategy: to get my hands on my super.
Learn
more: Show me the money, The Age, 3 Dec
2001
There are ways of getting early access to your superannuation. Lucinda Schmidt
explains.
Eligible Termination payments
An eligible termination payment (ETP) is a lump sum superannuation benefit
or similar payment. Most lump sums from a superannuation fund or approved deposit
funds are ETPs. A lump sum payment from an employer to employee "in consequence
of termination of employment" (other than unused annual leave, unused long
service leave, tax free redundancy and early retirement payments, or salary
or wages) will usually be an ETP.
Reasonable benefit limits
Reasonable benefit limits (RBLs) are the maximum amount of retirement and termination
of employment benefits that an individual can receive over his or her lifetime
at concessional tax rates. These benefits are ETPs, superannuation pensions and
annuities (including allocated pensions and annuities).
How you choose to take your super payout, will be affected by whether the
benefit comes under the lump sum Reasonable Benefits Limit. For example, taking
a lump sum will fall under the lump sum RBL rules where favourable tax treatment
is enjoyed by amounts up to the lump sum RBL – currently $562,195. Any super
savings greater than that amount is regarded as an excessive benefit and if
taken as a lump sum is automatically taxed at the highest personal tax rate
of 47 per cent.
The government introduced RBLs to stop people parking all their money into
superannuation in order to take advantage of the favourable tax treatment.
Pensions and annuities
If you choose to take your superannuation in the form of an income stream such
as a pension or annuity instead of a lump sum, then you will receive greater
tax concessions.
A superannuation pension is an income stream payable from a superannuation
fund. The amount of the payments will usually be set out in the trust deed of
the superannuation fund. Some superannuation pensions are reversionary, that
is the pension becomes payable to another person (usually a surviving spouse)
on the death of the fund member.
An annuity is an income stream purchased with a capital amount and is generally
payable for a fixed period or for life.
Pensions and annuities are very similar in that both supply regular periodical
payments. The main difference is the source of the payment. An annuity is generally
purchased from a life assurance company or a registered organisation and is
paid under a contract. Payments are made periodically eg monthly, quarterly,
half yearly or yearly.
Nominating a beneficiary
When you take out super for the first time, you will be asked to nominate the
person you want as your beneficiary. Times change. The person you nominate when
you are 20 may not be the person you want to nominate when you are 40. Check
each year who you have named as beneficiary and change it is you wish. The trustees
of the fund are not obliged to pay the nominated beneficiary, unless you are
offered a binding nomination. This binding nomination lasts for three years
and means the trustees have to abide by your choice.
Learn
more: If I should die ..., Sydney Morning
Herald, 27 Nov 2002
A binding nomination lets you direct who gets your super death benefit, reports Christine Long.
If
you have a binding nomination arrangement, review your nomination every three
years.
What you'll learn in this step: Find out about special circumstances
that can affect you and your super.
Maternity leave
While you probably won't make any payments towards your super during maternity
leave – and neither will your employer – your money is still there and growing.
This may be the time to get your spouse to contribute to your fund and to receive
a rebate.
Bankruptcy
If you are declared bankrupt, you do not lose your superannuation entitlements.
And you might be able to access your super ahead of time on the grounds of severe
financial hardship.
Divorce
Divorce settlements will now take superannuation assets into consideration.
The legislation is expected to come into effect in late 2002. The Bill allows
separating couples to divide either party’s super on marriage breakdown, either
through an agreement or by obtaining a court order. It took many years to come
into effect but now married couples will be able to divide their superannuation
interests on separation in the same way as they divide their other assets.
The changes introduced in the Family Law Legislation Amendment (Superannuation) Act 2001 provide that a superannuation interest can be divided by agreement or a court order on marriage breakdown. The Act commences on 28 December 2002 and may also apply in certain circumstances to marriages that were dissolved before 28 December 2002.
Consumer protection
Unhappy with the way your super is being managed? In the first instance, talk
with the trustees of your super fund or the financial institution concerned.
If the matter is unresolved, call the Financial Complaints Referral Centre on
1300 780 885.
Useful Information:
Australian
Taxation Office Superannuation Helpline 131 020 or visit www.ato.gov.au/super
Department
of Employment, Workplace Relations and Small business 1300 363 264
Step 1:
Step 2:
Learn
more: 
Each week financial advisor Noel Whittaker answers your
questions.
