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 the investment decisions on behalf of its members.
For those looking for transparency and control when it comes to their considerable retirement savings self-managed superannuation funds offer an ideal solution for those who are prepared to take on the obligations associated with being a Trustee. Superannuation master funds (or Wrap accounts) have also gained significant popularity as they offer similar transparency and control without the need to take on the role of Trustee. .
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 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 11% 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.
Concessional contributions are subject to annual caps, currently $27,500 per annum.
Carry forward Concessional Contributions
You can carry forward any unused amounts in your concessional contributions cap that have accrued 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.
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 as to whether they can only utilise the annual cap (currently $110,000) 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.
If you are over the age of 55 and you sell your home, you can contribute up to $300,000 to superannuation from the sale proceeds. This is a one-off opportunity. In terms of taxation, it is treated the same as a non-concessional contribution, but it does not count towards the cap.
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:
- Leaving an employer having reached 60 years of age.
- Reaching age 65.
- Retirement having reached their preservation age.
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.
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.
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.
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.
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 very 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.