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
Broadly speaking there are two types of contributions that can be made to superannuation. These are referred to as concessional and non-concessional contributions.
Concessional Contributions (CCs)
Concessional contributions commonly fall into 3 categories:
- Employer contributions – For most employers it is compulsory to make contributions on behalf of their employees. The minimum rate of these contributions (known as the ‘Superannuation Guarantee’) is currently 9.5% of an employee’s income.
- Salary Sacrifice contributions – This is where an individual forgoes part of their salary in exchange for additional contributions being made into superannuation by their employer.
- Personal Concessional contributions – Individuals are able to claim an income tax deduction for personal super contributions regardless of their employment arrangements. Individuals aged between 65 and 75 must meet a work test to be able to make personal contributions.
The total concessional contributions that can be made to a fund in one year are as follows:
|Total super balance||Annual CC cap||Contribution tax|
|Under $500,000||$25,000 plus previous years’ unused cap1||
15% if income is under $250,000
30% if income is over $250,0002
15% if income is under $250,000
30% if income is over $250,0002
1 If your total superannuation balance is under $500,000 you can carry forward for up to 5 financial years of unused CC caps accrued from 1 July 2018. Therefore the first financial year this can be accessed is 2019/20.
2 An additional 15% tax is payable for individuals whose income exceeds $250,000 pa, hence a total 30% tax is applied on CCs.
If concessional contributions are made in excess of the cap, the excess amount will be added to your assessable income and taxed at your marginal tax rate less a 15% offset; and counted towards your non-concessional contribution limit unless the excess is withdrawn from superannuation.
Carry forward Concessional Contributions
You can carry forward any unused amounts in your concessional contributions cap that have accrued from 1 July 2018 onwards, for up to five financial years.
To be eligible to contribute carry forward concessional contributions, your ‘total superannuation balance’ must be less than $500,000 as at 30 June of the previous financial year.
Non-Concessional Contributions (NCCs)
Contributions made to superannuation with after tax dollars or personal savings (where a tax deduction is not claimed) are known as non-concessional contributions.
This type of contribution is not taxed on entry into superannuation and can be withdrawn tax free upon satisfying a condition of release such as retirement.
There are limits on the amount of non-concessional contributions that can be made to a fund. The cap will depend upon a member’s age and their total super balance (TSB) as to whether they can only utilise the annual cap or bring-forward future caps in any one year.
The ‘bring-forward’ rule allows you to contribute up to three times the non-concessional contribution cap in a financial year. Once a bring-forward period has been triggered, an individual’s cap is defined by their remaining cap under their bring-forward provision.
The total non-concessional contributions that can be made in one year are as follows:
|Age||Annual NCC cap||NCCs able to be brought forwards|
$100,000 equal to 4 times the concessional contributions cap
(4 * $25,000)
If TSB under $1.4m
If TSB between $1.4m – $1.5m
If TSB between $1.5m – $1.6m
If TSB over $1.6m
|65 to 74||
If work test is met $100,000 equal to 4 times the concessional contributions cap
(4 * $25,000)
|Ineligible for bring-forward provision|
*Generally available to those who are under 65 years of age at the start of the financial year the contribution is made.
If contributions are made in excess of these limits and are not withdrawn, the excess will be taxed at the top marginal tax rate plus the Medicare Levy.
If you are aged between 65 and 74 you must have worked for at least 40 hours within any 30 consecutive days in a financial year to make any personal contributions to superannuation.
If however your total superannuation balance is below $300,000 and you met the work test in the preceding financial year, you may make a personal contribution to superannuation without having to satisfy the work test for the current financial year.
Total Superannuation Balance
Each individual has a Total Superannuation Balance (TSB) measured for them on 30 June of the prior financial year. It is a measure of your total interests in the accumulation and retirement phases of superannuation and is calculated as:
- The sum of:
- The accumulation phase value of all superannuation accounts
- The market value of all account based income streams
- The transfer balance cap value of any other income streams
- Any rollovers in progress at the time of measuring
- Less any personal injury or structured settlement contributions within these accounts.
Your TSB will determine your eligibility to make non-concessional contributions (and the amount you can make), the spouse contribution tax rebate, the government co-contribution and your ability to use the ‘unused concessional contributions cap carry-forward’ rules.
Accessing Superannuation Benefits
The purpose of superannuation is to provide benefits for retirement. To ensure this occurs in most cases the Government has legislated that superannuation is ‘preserved’, that is members can’t access their benefits until they meet a ‘condition of release’.
The most common conditions of release are:
- Attaining preservation age: Members who are under 65 and have reached preservation age, but remain gainfully employed on a full-time or part-time basis, may access their benefits as a non-commutable income stream.
- Attaining age 65: A member who reaches age 65 may cash their benefits at any time.
- Retirement: Actual retirement depends on a person’s age and, for those between preservation age and 60 years old, their future employment intentions. A retired member can’t access their preserved benefits before they reach their preservation age which is based on when they were born as listed in the table below.
|Before July 1960||55|
|July 1960 – June 1961||56|
|July 1961 – June 1962||57|
|July 1962 – June 1963||58|
|July 1963 – June 1964||59|
|After June 1964||60|
There are a number of other circumstances in which benefits can be released before reaching preservation age, such as incapacity, severe financial hardship, temporary residents leaving Australia, terminal medical condition. There are specific rules for each of these and some have restrictions on the way the benefits can be received.
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 an account based 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 account based 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 (2019/2020)
|Age of Recipient @ 1 July||Percentage Factor|
|Under age 65||4%|
|65 – 74||5%|
|75 – 79||6%|
|80 – 84||7%|
|85 – 89||9%|
|90 – 94||11%|
|95 and over||14%|
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.
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.