Superannuation

Superannuation is one of the more complex areas of financial planning. As a result there is much confusion about superannuation and how it works.

Many Australians view superannuation as an investment. Depending on their most recent statement, superannuation is either a good investment or a bad investment.

Superannuation is not an investment.

A superannuation fund is a trust. The trustee is responsible for the investment (and custody) of the trust’s assets. The trust assets are the property of the superannuation fund members.

The majority of large superannuation funds offer their members a limited choice in terms of investment options. In effect the superannuation fund trustee makes all of the investment decisions on behalf of its members.

However many Australians prefer transparency and control, particularly when it comes to their considerable retirement savings. As a result “self-managed superannuation funds” have become the largest sector in terms of funds invested accounting for roughly a third of all superannuation assets in Australia.

Superannuation master funds (or Wrap accounts) have also gained significant popularity as they offer the ability to select specific investments. They too offer transparency and control.

We believe it is very important that superannuation fund members know where their retirement savings are invested.

Getting Money into Super

There is generally no limit to the amount that may be contributed to superannuation by (or on behalf of) a member in any one financial year. However the member will be liable for tax on contributions made in excess of the prevailing contribution caps.

Concessional contributions – current contribution cap is $25,000 pa.

A concessional contribution is generally one made to a complying superannuation fund which is taxable and included in the super fund’s assessable income. In most instances, this will occur because the contributor (an Employer or Self-employed person) is entitled to claim a tax deduction for the contribution.

Non-concessional contributions – current contribution cap is $150,000 pa.

A non-concessional contribution is generally a super contribution to a complying superannuation fund which is not included in the fund’s assessable income. It is generally a contribution made by the member with after-tax money.

Contribution Eligibility Rules

In order to make a contribution into a superannuation fund it is necessary to be eligible under superannuation law to make that contribution. For those under age 65 there are generally no limitations. For those over 65 it is necessary in most cases to meet the work test. A member meets the work test if they have been gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in the financial year.

Preservation of Superannuation

Superannuation has been established for the sole purpose of providing retirement benefits. As such, access to benefits is restricted, with all superannuation contributions and earnings from 1 July 1999 being compulsorily preserved until a condition of release has been met.

Where a trustee of a regulated super fund is reasonably satisfied that a member has met a condition of release the member’s “preserved” and “restricted non-preserved” benefits in the fund become “unrestricted non-preserved” benefits (i.e. accessible).

The most common conditions of release are:

• Retirement on or after preservation age
• Attaining age 65
• Death
• Permanent incapacity
• Termination of gainful employment (restricted non-preserved amounts)
• Terminal medical condition
• The preservation age varies depending on date of birth.

Transition to Retirement

From 1 July 2005, a new condition of release was introduced, known as the ‘transition to retirement’ condition of release. There are no work or retirement tests related to this condition of release. A person may or may not be working and still access super under this condition of release.

A transition to retirement income stream is an account based income stream or annuity. The total (pension or annuity) payments in any year are limited to a maximum of 10% of the account balance at the start of each financial year.

The minimum income payments are shown in a table further on and are the same as other account based income streams.

Lump Sum Retirement Benefits

It is becoming increasingly unusual for Australians to take their retirement benefits in the form of a lump sum. However there are circumstances where it may be desirable to do so. There is also the circumstance where lump sums are paid out in the event of the superannuation fund member’s death.

When retirement benefits are taken as a lump sum some tax may be payable and the proceeds are invested elsewhere.

Retirement Income Streams

Retirement income streams take the form of a pension or an annuity. Whilst there are generally a number of differences between a pension and an annuity, they both provide a form of income stream and are paid from different providers. Super funds generally provide pensions and an annuity is paid under a contract with a Life Company.

A pension may be commenced using accrued super benefits, whether during the lifetime of the fund member or to one or more of their dependants following the member’s death. A super income stream cannot be paid to an Estate.

The primary appeal of pensions and annuities is the tax free status accorded to fund earnings, pension payments and annuity payments.

Tax free income and the flexibility to access capital make pensions a very attractive proposition for many Australians. Alternatively tax free annuity payments and the certainty provided by an annuity contract are equally appealing to others.

Pro-rata rule and ‘1 June rule’

Where an income stream commences part way through the financial year, the minimum income payment is pro-rated based on the days remaining in the year. The 1 June rule may also apply, which means that no payments are required to be made until the following financial year for an account based pension or annuity commenced after 1 June in a financial year.

Account-based income stream – minimum annual income payments

In order to meet the payment standards, the terms of an account-based income stream must ensure that a minimum income payment is made at least annually. There is no maximum income payment that must be paid (unless it is a transition to retirement income stream where the maximum annual income payment is capped at 10% of the account balance).

Minimum income percentage factors (2012/2013)

Commutations (the ceasing of an income stream)

Account-based income streams must generally be commenced with unrestricted non-preserved benefits and may be commuted at any time. However, prior to either a full or partial commutation, either a pro-rated minimum income payment must have already been paid during the financial year or the remaining account balance is sufficient to ensure that at least the minimum annual payment could be paid.

Commutations may also be made, regardless of the level of income payments made, to pay a:

• Death benefit;
• Surcharge liability;
• Family law payment splitting amount;
• Cooling-off amount; or
• Release authority amount.

In summary

It is important to recognise that retirement planning is a potential minefield and a complex one at that. The information provided in this section is designed to provide a brief overview of the current superannuation landscape in Australia. The information provided is not comprehensive and it is not complete.

In short, you need professional advice.

If you would like a Century Private Wealth Certified Financial Planner to assist you with your superannuation needs, please click here.