Below is a 4-step guide to How Does Superannuation Work?
STEP 1 – SETUP AN ACCOUNT
You should already have at least one superannuation account. If you’ve ever had a job – even if only part-time or casual – it is likely that your employer was required to make superannuation contributions on your behalf. If you did not notify them of an existing account that you had, they would have organised to set one up for you. It is possible that you may have more than one superannuation account.
If you do not have a superannuation account, or do not know if you have an account, you can set up a new one. There are hundred of superannuation accounts to choose from. I have compiled a list of Superannuation Companies in Australia.
If you’re looking for something easy, low cost and low maintenance, an Industry Fund is probably best suited for you.
If you want a bit more control and a wider range of investments – and willing to pay a bit more – you should consider a Retail Fund.
The fees, investment options and investment performance will vary between each account from year to year. But, at the end of the day, every superannuation fund is required by law to manage your superannuation savings in a compliant manner in the best interest of its members (YOU!). To a certain degree, the investment choice you make will impact the investment return you receive, so you will have to take some responsibility in this area.
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For those of you with a considerable superannuation balance who would like great control of your savings, you might consider a Self Managed Superannuation Fund (SMSF)
STEP 2 – CONTRIBUTE
To build up your superannuation account, you will need to make contributions to it, or notify your employer that this is your preferred superannuation account, so they can make contributions to it as part of their obligations to you as an employee under the SG rules.
The intention of superannuation is to provide you with savings for when you decide to retire from the work force and have satisfied a Superannuation Condition of Release.
A benefit of investing your retirement savings into superannuation is that all earnings received on your investments are taxed at a maximum of 15% – compared to being taxed at your Marginal Tax Rate (MTR) if you were to invest in your individual name. The only downside is that you are unable to access these savings until you satisfy a Condition of Release.
Be sure that you do not exceed any of the superannuation contribution caps.
STEP 3 – DRAWDOWN
Once you reach retirement your superannuation balance will consist of all contributions made into your account, plus any earnings.
You can use these accumulation savings to commence a retirement income stream. This income stream can be used to assist with covering your living expenses throughout retirement.
The added benefit of converting your superannuation savings into an income stream is that all earnings received from the investments within your account are received completely tax free, as is all pension income if you are over the age of 60 (excluding the taxable (untaxed) component).
STEP 4 – DEATH
Your Will does not make a provision for the distribution of your superannuation savings.
A separate document known as a Death Benefit Nomination is responsible for the distribution of your superannuation.
You are generally able to make this a ‘Binding’ Death Benefit Nomination or a ‘Non-Binding’ Death Benefit Nomination. However, some funds only permit a Non-Binding Nomination.
You will need to complete a Death Benefit Nomination and provide it to the trustee of your superannuation fund for it to be active. They will generally have this form on their website.
A Binding Nomination requires the trustee of the superannuation fund to pay your benefits precisely as you wished according to your valid nomination at the time of your death.
A Non-Binding nomination leaves some flexibility, whereby the trustee can consider what your nomination states, yet may distribute your benefits differently, based on your circumstances and relationships at the time of your death.
When you pass away your superannuation savings must be paid to a dependent, as defined by superannuation legislation.
There are various tax consequences resulting from the payment of death benefits, which depends on your relationship with the person they are paid to and in what form they were paid (lump sum or income stream).
Hopefully this has given you a bit of an idea of how superannuation works.
If you would like anything clarified or have any further questions about How Does Superannuation Work? or any other topics, please do not hesitate to leave a comment.