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Superannuation: understanding the basics

1 April 2016

Superannuation is an investment strategy for your retirement that you can build up during your working life.

The benefits of super

Guaranteed contributions: If you are working, your employer is generally required to contribute at least 9.5 per cent of your salary to your super fund on your behalf (this is known as the superannuation guarantee or SG). Most employees who are above age 18 and are earning more than $450 per month are eligible for SG contributions. This applies whether you are full-time, part-time or employed on a casual basis.Investment options: Your super fund pools your super money with other members’ funds and invests the money in assets, such as property, shares, fixed interest and cash investments. By carefully choosing the best assets, your fund makes sure that the money you contribute is looked after and grows. The aim is to build up as much money as possible for your retirement, to ensure a comfortable lifestyle.

Timeframe: Superannuation is generally a long-term investment. This means that your money has a long time to benefit from the growth of your investments.

Your super account

Your super account diagram

Assumes earnings of 7% per annum before tax, fees based on 2% per annum administration + investment management fee. The investment earnings for contributions is calculated on a quarterly basis.

* Included for illustrative purposes only.

Things to consider

Fees: To pay for the cost of looking after your super, fees are deducted from your account. Also, as super is an investment, the Government also charges tax albeit at a concessional rate.

Insurance premiums: Sometimes your super fund offers insurance to cover you for death, total and permanent disablement and income protection. If you elect to have insurance cover within your super fund, then the premiums for that insurance are deducted from your account.

Preservation age: The Government has placed restrictions on when you can access your super benefits, to ensure that super is used in retirement and not beforehand.

Your preservation age is the Government specified age at which you can gain access to your superannuation benefits, provided you have permanently retired from the workforce. Your preservation age is determined by the year you were born.

What’s your preservation age?

When were you born?

Your preservation age

Before 1 July 1960

55

1 July 1960 – 30 June 1961

56

1 July 1961 – 30 June 1962

57

1 July 1962 – 30 June 1963

58

1 July 1963 – 30 June 1964

59

After 30 June 1964

60

Access to your benefits

All contributions paid into a superannuation fund are preserved until you have met a condition of release such as reaching your preservation age and being retired from the workforce. In other limited circumstances you may be able to access your superannuation benefit, for example under financial hardship, if you become totally and permanently disabled or under the transition to retirement rules.

At retirement

Once you retire, your fund may give you the option to take your superannuation benefit as either a lump sum or as an income stream. An example of an income stream product is an account-based pension.

Have you lost your super?

The Lost Members Register is a central register of lost superannuation fund members and retirement savings account (RSA) holders. There are a number of ways you can check if you have any lost superannuation:

You can conduct your own search via the Australian Tax Office’s SuperSeeker self-help telephone service on 13 28 65. This telephone service is available 24 hours a day, 7 days a week.

You can contact your current superannuation fund and ask them to conduct a search on your behalf.

You can download and complete a Lost Members’ enquiry form via www.ato.gov.au

Superannuation: understanding the basics

1 April 2016

It’s essential that you take an interest in how your superannuation savings are invested as it is likely to be one of the biggest assets you will own. The decisions you make now about your super fund will affect the amount you have in retirement – in other words, your retirement lifestyle depends on it!

Super is one of the most tax-effective ways to save for your retirement. However, there are many different options of super funds available in today’s increasingly complex market and not all super funds are the same.

Generally, Australians can choose where their current employer directs their 9.5 per cent compulsory superannuation guarantee (SG) contributions. Some super funds make it easier to take advantage of tax-effective strategies to add to your retirement savings and some super funds provide insurance cover while others offer greater investment choices.
An important first step is to decide what benefits and features are important to you in a super fund. You can then better match your personal needs to the super funds available, helping you to meet your retirement goals.

Strengthening your super fund through consolidation

Many Australians have more than one super fund as a result of changing jobs. This is why one of the first strategies your financial adviser may undertake is to help you consolidate your super funds. Consolidating super funds can help you save money by reducing the costs of fees and charges associated with operating multiple super funds. It can also make administration, asset allocation and investment management easier for you.

Types of super funds

Although most people have an accumulation fund, there are many different types of super funds.

Accumulation funds

The amount of your superannuation balance at retirement depends on two main factors:

  • the amount of money that has been paid into the fund
  • the fund’s return on investment, after all costs and taxes are deducted.

Accumulation funds allow you to take the risks and reap the rewards from your fund’s investment performance.

Self-managed super funds (SMSFs)

Another option is to set up your own super fund and manage it yourself. Keep in mind, if you choose this option your fund must abide by all rules set by the superannuation laws and the Australian Taxation Office.

In short, the requirements include:

  • becoming a trustee of the fund – a role requiring you to perform important legal duties
  • the fact that the money can be used only to offer retirement benefits
  • solid administration – making sure detailed records are kept so your fund can be regularly audited.

You will need:

  • to make it worthwhile, so a minimum base super balance of at least $250,000 is generally recommended
  • to ensure that the account is well administered and managed by employing the services of professional accounting, tax, audit and legal advisers,
  • the ability, time and interest to run the super fund and to arrange suitable insurances.

For more information about SMSFs, please refer to our ‘Self-managed superannuation funds’ factsheet.

Defined benefit funds

With a defined benefit fund, your superannuation benefit at retirement is defined by the fund’s regulations and generally depends on:

  • the amount of money that has been paid into the fund
  • your level of earnings at the time of your retirement
  • your length of service with your employer.

For example, your retirement balance could be worth four times your final salary after 20 years membership.

It is important to note a defined benefit account cannot be reinstated once it has been closed, so it is in your best interest to seek advice from a financial adviser before making a decision. For more information, please call DMFS Financial Advisers on 1300 364 650.

Key features and benefits of super funds

When deciding on which super fund is suitable for you, the different features of a super fund are important considerations.

Insurance

Opting to implement insurance within your super fund can be beneficial. Larger super funds have the ability to offer lower premiums as they are covering a large number of members on a group basis. Another benefit is to your hip-pocket – by paying insurance through your super fund instead of your post-tax income, all your premiums are generally tax-deductible to the fund, whereas the only insurance that is usually tax deductible outside of super is income protection insurance. The different types of cover generally available are income protection, total and permanent disablement and life insurance.

Considerations when taking out insurance within your super fund include:

  • Characteristics: the features of your super fund can vary greatly between different providers. These features include the level of cover available, automatic acceptance levels, different underwriting terms, and claimable conditions.
  • Limits: consideration should also be given to the restrictions that may be built into the cover offered. For example, you might be unable to keep the insurance cover if you change jobs.
  • Restrictions: can also refer to part‑time or casual work, dangerous jobs, maternity leave and your age.
  • Charges: super funds will generally charge an insurance premium to your account for the insurance, unless your employer pays for it. Costs do vary greatly between providers, but your financial adviser will have this information readily available for comparison.

Investment choice

Investment choice is essential as it will allow you the flexibility to modify your super investments to meet your personal preferences and needs, which may alter over time.
The decisions you make now can have a large impact on the funds you have accessible for your retirement.

At the very least, a super fund should offer a minimum of five options to match your risk profile and asset allocation needs. The level of choice required will be based on the level of control you want over the investments within your portfolio and the investment strategy you have in place.

Some super funds have default portfolios (known as model portfolios, multimix or managed accounts), some offer a choice of over 200 managed funds and access to the top 300 ASX listed shares.

Your goal when evaluating a super fund’s investment choices is to have the freedom to construct a portfolio to best meet your needs.

Investment performance

Although performance of the investment is important, historical performance is not an indicator of future performance, especially if you’re looking at short-term investment periods of one to three years. It should be noted that some investments within super funds can be high risk and provide high returns in the short term but that isn’t always applicable over the long term.

As a guide, you should consider at least five years of performance figures as a basis to compare funds. Compare products only where they have consistent objectives, asset allocations and are calculated over the same time period.

The performance figures should also be calculated consistently (for example, is the figure before or after tax and fees).

Your financial adviser can help you compare the performance of various super funds.

Fees and charges

Another important consideration when selecting your super fund is to compare the costs, as the fees you pay will have an impact on the sum of money you have for your retirement. It is in your best interest to consult your financial adviser as some fees may be hidden or difficult to calculate, and they will be able to provide a clear comparison between them.

The following are some examples of fee types applicable to super funds:

  • Administration fees are charged for the administration of your super fund. These fees are generally charged as either a flat dollar amount or a percentage of your account balance. The administration fee can include a number of different fees such as the actual administration fee, trustee fee, responsible entity fee and expense recovery fee.
  • Management fees are charged by fund managers for managing the underlying investment in which you have invested. The management fee can be included within administration fees or they may be taken into account in the value of the underlying investments.
  • Contribution/entry fees are charged on the initial and sometimes subsequent investments you make into the fund or those made on your behalf. Many super funds charge and keep these fees but others let you negotiate them with your financial adviser and do not keep any fees.
  • Exit fees/penalties are fees charged when you either exit your fund or where you exit the fund within a minimum prescribed period of time.
  • Performance fees are charged by the underlying fund managers where they create performance greater than arranged standards. Performance fees are in addition to the standard management fees.
  • Adviser service fee is charged where you consult your financial adviser on a regular basis. Your financial adviser will disclose any remuneration that may be charged to or received from your super fund. It is in your best interest to seek financial advice as it is an important element in making the right financial decisions and in the long run, will be beneficial to your super balance.
  • Other fees include investment switching fees which can apply when you modify the investment choice in your super fund; and buy/sell costs where the price you pay to enter an investment option is larger than the price you receive when you sell the investment.

Super service

The services a super fund can offer generally include a member website and client service centre, employee online reporting, education services and member newsletters. Online reporting can allow you to view your account details 24 hours a day, 7 days a week. Super fund websites could provide you with information like:

  • your current balance
  • up-to-date performance data for all your investment choices
  • insurance cover information
  • consolidated asset allocation of all investments
  • information regarding basic investments and their values
  • details of all transactions and charges to your account.

Other key strategy features

Other strategies within super you could consider include:

  • binding and non-binding death benefit nominations
  • transparency of underlying fund managers
  • auto-rebalancing
  • nomination of specific funds for regular savings or withdrawals
  • anti-detriment payments.

Your financial adviser will be able to provide you with more information about any of these strategies and many more.

Life stages

An ideal super fund will have the flexibility to change with you as you transition from your working life into retirement. Your chosen super fund should allow you to move effortlessly from the accumulation phase into the pension phase. Your super fund should also be able to provide a variety of income streams, including pre‑retirement pensions and account-based pensions, without any extra costs necessarily being incurred.

Facilitating financial advice

Financial advice is important in helping you make the right decisions in a complex superannuation environment. Some funds make it easy for you to pay for this advice as they allow you to pay through the super fund on flexible terms. For example, initial advice on your fund selection may be paid as a one-off fee from your super roll-over.
For ongoing advice, the fund should provide a feature to allow the fee to be deducted monthly from your account. This means you can use your super fund to pay for the advice related to super rather than having to incur an out-of-pocket expense.

Contributing to super

1 April 2016

Superannuation is arguably the most tax-effective way to save for your retirement, as contributions and withdrawals are taxed at a concessional rate. But with so much jargon about the different methods of contribution limits and restrictions, it can be hard to know what’s best for you. We have put together a guide on the most common types of super contributions.

Are you eligible to contribute?

Before we can go any further, it’s important to understand whether you are eligible to make contributions to your super.

Age

Personal 2,3
contribution

Employer 
contribution

Spouse 
contribution

Under 65

· 100% tax deductible4

· Co-contribution available5

· 100% tax deductible

· Spouse contribution rebate may be available

· No co-contribution

65 to 69

· Must be gainfully employed for at least 40 hours within a period that is no more than 30 consecutive days during financial year of contribution

· 100% tax deductable4

· Co-contribution available5

· Super guarantee (SG) and industrial award or agreement allowed

· Salary sacrifice/other employer contributions: Must be gainfully employed for at least 40 hours over a period not more than 30 consecutive days during financial
year of contribution

· 100% tax deductible

Contribution allowed provided recipient spouse has been gainfully employed for at least 40 hours over a period of not more than 30 consecutive days during financial year of contribution

70 to 74

· Must be gainfully employed for at least 40 hours over a period not more than 30 consecutive days during financial year of contribution

· 100% tax deductible4

· No co-contribution if age 71+ at the end of the financial year.5

· Super guarantee (SG) and industrial award or agreement allowed

· Salary sacrifice/other employer contributions: Must be gainfully employed for at least 40 hours over a period not more than 30 consecutive days during financial
year of contribution

· 100% tax deductible

Not allowed

75 and over

Not allowed

· Award/industrial agreement only

· 100% tax deductible

· SG payable

Not allowed

1. Age is determined at date of the last contribution in that financial year. For spouse contributions, it refers to age of recipient spouse.
2. Excess concessional contributions made from 1 July 2013 are effectively taxed at your marginal tax rate (plus an excess concessional contributions tax interest charge). You also have the ability to withdraw 85 per cent of your excess concessional contributions.
3. Individuals are allowed the option of withdrawing excess non-concessional contributions made from 1 July 2013 ( and associated earnings), with these associated earnings to be taxed at the individual’s marginal tax rate. For spouse contributions, non-concessional
cap of the recipient spouse is relevant.
4. Eligibility criteria apply.
5. Subject to eligibility rates.

Types of contributions

1. Concessional contributions

Concessional contributions are contributions made into your super fund for your benefit, and which have generally been claimed as a tax deduction, usually by your employer. Typically, these will include employer SG contributions, salary sacrifice contributions and contributions you have made for which you’re entitled to (and have claimed) a tax deduction (such as self-employed contributions).

Limits on concessional contributions

Because of the tax concessions there is a limit on the amount of concessional contributions you can make.

This cap is $30,000 per annum. From 1 July 2014 the $35,000 cap will be available for people aged 50 and over during the financial year.

If you make a concessional contribution it will be taxed at 15 per cent, and this tax is paid from your contribution (ie with no out of pocket expense for you). This contributions tax may be up to 30 per cent for individuals with incomes over $300,000 pa from 1 July 2012.

Excess concessional contributions made from 1 July 2013 are effectively taxed at your marginal tax rate (plus an excess concessional contributions tax interest charge). You also have the ability to withdraw 85 per cent of your excess concessional contributions.

If you earn less than $37,000 you may be eligible for the low income superannuation contribution (LISC) from the Government. The LISC refunds the 15 per cent contributions tax you pay on your SG contributions and any salary sacrifice contributions you make.

The LISC will be abolished after 1 July 2017.

2. Non-concessional contributions

These are contributions you make to a super fund for which you have not claimed a personal tax deduction.
Non-concessional contributions can include contributions made by:

  • any eligible individual with after-tax money
  • a spouse, or
  • a self-employed person who doesn’t claim a tax deduction for the contribution.

Advantages of non-concessional contributions

A non-concessional contribution is made with after tax money and therefore, offers the following benefits:

  • There will be no contributions tax.
  • The earnings on your investment will be taxed at a maximum rate of 15 per cent.
  • When you access your super in the future, any non-concessional contributions will be returned to you completely tax-free, either as part of a lump sum payment or over time as part of a pension.
  • By making a non-concessional contribution you may qualify for a super co-contribution from the Government.

Limits for non-concessional contributions

There is a limit on the level of non-concessional contributions you can make to super each year. The limit for 2015/16 is $180,000.

However, if you’re under 65 during the financial year, you can take advantage of the averaging rule to bring forward two additional years worth of non-concessional contributions and contribute up to $540,000 in one year. This may come in handy for those who receive a financial windfall such as an inheritance or the sale of a large asset. But be aware that if you choose this course of action, you may not be able to contribute any more in the next two years.

From 1 July 2013 excess non-concessional contributions can be refunded. To obtain a refund you will have to wait for the ATO to issue you with an excess non-concessional contribution determination and you have 60 days to let the ATO know what you want to do. A notional amount of investment earnings on those funds will be taxed within your annual income tax return.

3. Spouse contributions

Making non-concessional contributions to your spouse’s super fund can be an effective strategy to reduce, or even eliminate, the amount of tax you will pay on that income in retirement. This strategy can also assist in equalising the level of retirement income that you and your spouse can receive.

What is the definition of spouse?

The term spouse includes both a husband or wife in either a legal or a de facto relationship (includes same-sex couples). A de facto spouse must live with you on a genuine domestic basis as a husband or wife. Separated couples (even if legally married) don’t satisfy this definition of a spouse and can’t make a spouse contribution, unless the reason for separation is that one of the couple is in hospital.

Conditions for making spouse contributions

To make a spouse contribution without having to meet further conditions, your spouse must be under 65.

If they are between 65 and 69, you can only contribute to their super if they have been gainfully employed for at least 40 hours in not more than a consecutive 30 day period during the financial year.

You, as the contributing spouse are not subject to any conditions and, while you don’t have to be working, you must have sufficient income to utilise the spouse contribution rebate.

If your spouse’s total combined income (assessable income plus reportable fringe benefits) is less than $13,800, you may claim a rebate of up to $540 for the contributions you make to your spouse’s super. The rebate amount that you are entitled to is the lesser of:

  • the spouse contribution x 18%, or
  • $540.

Your spouse won’t be able to withdraw the funds until they satisfy a condition of release to access their super.
If your spouse has never been gainfully employed, they cannot access their super benefits before age 65 because they would not be able to satisfy the retirement condition of release.

4. Government’s super co-contribution

The Government’s super co-contribution is an initiative aimed at encouraging Australians to invest more for their retirement.
Under this scheme, for every dollar you contribute, the Government will match it with a co-contribution of $0.50. If your total income is under $35,454 and you make personal contributions of $1000, you’ll receive the maximum co-contribution of $500 in a financial year. This amount reduces by 3.333 cents for every dollar of your total income above $35,454 and cuts off at $50,454.

You are eligible to receive the super co-contribution if:

  • you make a personal after-tax super contribution to a complying fund
  • your total income (assessable income plus reportable fringe benefits + salary sacrifice to super) is less than $50,454
  • 10 per cent or more of your total income is from eligible employment or self‑employment
  • you are not a temporary resident at any time during the year, and
  • you are aged under 71 at the end of the financial year.

contact

Level 8, 350 Collins Street

Melbourne VIC 3000

1300 364 650
(03) 8672 0287
david@dmfsfinancial.com.au