What is Superannuation? Superannuation is a vehicle saving for retirement in a tax-effective manner.
Superannuation is a trust structure. This means that a trustee is responsible for the management of benefits on behalf of its members.
Each member will have a member balance (account). This member balance is either in ‘Accumulation Phase’ (pre-retirement) or ‘Pension Phase’ (post-retirement).
What’s the catch of investing in Super?
Any amount that you or someone else, such as your employer, has contributed into your superannuation account will be inaccessible until you meet a condition of release.
Some examples of a condition of release are:
- Permanent retirement after your preservation age
- Reaching age 65
- Ceasing an employment arrangement after age 60
What does my superannuation invest in?
You can invest your superannuation savings in almost anything you like (subject to legislation and regulations).
The type of superannuation account that you will determine what investment options are available to you.
Why should I invest in superannuation?
Here are some reasons as to why you would invest in superannuation
- You have savings that you do not expect to need access to prior to retirement
- You would like to reduce your income tax by making deductible contributions to superannuation and are comfortable that you will be unable to access these contributions until retirement
- You would like to receive the Government Co-Contribution
- You like the idea of forced savings for retirement
- You would like to reduce the tax payable on your investment earnings
- As a rule of thumb, investing in superannuation is only tax-effective if your highest personal marginal tax rate is greater than 15%
What is Superannuation Tax?
All earnings received from investments within superannuation receive concessional tax treatment. The maximum tax on earnings in Accumulation Phase is 15% – reduced by 1/3rd for capital gains on the sale of assets held for longer than 12 months.
In Pension Phase, all investment earnings are completely tax free.
This can result in significant tax advantages when compared to having investment earnings taxed at your MTR.
Your member balance is made up of a ‘Taxable’ component and a ‘Tax-Exempt’ component. In Accumulation Phase, the Taxable Component is made up of investment earnings and contributions where a tax deduction has been claimed, known as Concessional Contributions (e.g. salary sacrifice, personal deductible). The Tax-Exempt Component is made up of after-tax contributions, known as Concessional Contributions.
In Pension Phase, the proportion of components remains static based on what the proportions were at commencement of the pension income stream.
Making Concessional Contributions by way of salary sacrifice or personal deductible contributions is beneficial as it reduces the amount of income taxed at your marginal tax rate (MTR), or provides you with a tax deduction, which then reduces your taxable income – for the same end result.
There are various types of superannuation accounts where you can invest your savings. These are:
Industry funds are typically low cost superannuation accounts linked to a particular industry. These funds are often the default funds if you are employed in a particular industry. For example, certain funds are designed to accommodate health care workers, the motor trade industry, construction workers, those in hospitality, etc. Most fees are payable as a percentage of your balance and a small weekly administration fee.
Retail funds tend to be a little bit more expensive than industry funds; however are becoming more competitive all the time. Retail funds provide a much wider range of investment options compared to industry funds, allowing you to put in place a more focused and personalised investment strategy. In most cases, the funds offer you access to ASX Listed shares and dozens of managed funds. Similar to industry funds, fees are charged as a percentage of your balance.
Corporate funds are employer linked funds that an employer has chosen to be the default fund for their employees. The employer can easily manage the account as all of their employees will fall under their umbrella - simplifying the contribution process. It also provides their employees with group discount benefits on things such as insurance and reduced administration and investment management fees. Corporate funds are similar to Retail funds. Again, fees are charged as a percentage of your balance.
SELF MANAGED SUPERANNUATION FUNDS (SMSF)
SMSF’s are superannuation funds that have fewer than 5 members and are run by the members themselves. In fact, every member of a SMSF must be a trustee (or director of a corporate trustee) and every trustee must be a member. The establishment and ongoing management of a SMSF is often done with the assistance/guidance of an adviser and/or accountant. A SMSF often has higher costs than all other superannuation accounts, however such costs are fixed. This means that as balances reach over $1,000,000, the fees, expressed as a percentage will likely be lower than the other types of funds.
SMSFs offer the most flexibility with regards to investment options and allow you to invest in direct property.
Care must be taken with SMSFs, as the require great resposibility and severe penalties may be incurred for non-compliance.
WHAT IS SUPERANNUATION IN A NUTSHELL?
Superannuation is a vehicle that allows you to save money for retirement in a tax-effective manner, due to the tax-concessions available. Tax concessions are provided as an incentive for more people to self fund their retirement, which ultimately reduces the stress on the Government to fund peoples retirement. This is especially important due to our ageing popluation that has resulted from the baby boom.