Superannuation is one of the main ways Australians can save for their retirement. You may choose a super fund or let your employer select one for you.
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- Superannuation is one of the main ways Australians can save for their retirement. You may choose a super fund or let your employer select one for you.
- Superannuation and How It Works
- Types of Super Funds
- Pros and Cons of Superannuation
- Superannuation Investment Options
- Comparing Super Funds: How and Why It is Important
- Growing Your Super Fund
- Switching Super Funds
- Shopping Tips for the Right Super Fund
- Why You Need a Financial Advisor
There’s a lot of jargon people use when talking about super in Australia. Therefore, understanding the basics can help you determine what kind of account you get and whether it’s right for you.
In this article, we break down the complexity surrounding superannuation by discussing what it is, how it works, and what types are available. We also discuss the essential information about different investment options to help you make wise decisions.
In superannuation, many rules and regulations apply. Nonetheless, the process will be much easier if you know what to do.
Superannuation and How It Works
Superannuation is a pension program designed by a company to help employees secure a retirement plan. Deposits in a super account grow over time, usually without tax implications, until the eligible person retires and enjoys the benefits.
The super fund is commonly available in Australia. Superannuation differs from other investment mechanisms, as the benefit is defined by a set schedule rather than the performance of an investment.
Eligibility for the pension program is determined by age and monthly income.
For example, an employee is eligible if they earn a monthly rate of $450 or higher before tax. The employer pays an extra 9.5% in contribution, called the superannuation guarantee (SG), on top of the employee’s salary.
Those under 18 years old can be eligible for superannuation if they have the same monthly income as mentioned above and work for a minimum of 30 hours per week.
For seniors and retirees above 55, there are specific tax and superannuation matters that should be considered. Factors vary depending on whether they’re still working, planning to retire, getting into retirement or already retired.
Employees can choose their super fund, except when the fund is specified in an industrial agreement and if the person is working in the public sector. There are separate conditions that apply in this case.
Super funds are accessible during the time of retirement in the form of lump sum and super pension. Withdrawals are generally without any tax. However, there may be tax implications for those below 60.
For example, if you’re younger than the preservation age and you decide to take money from your super, you may have to pay 22% tax plus Medicare levy or the marginal rate, whichever is lower.
Early withdrawal from super funds is allowed under certain conditions such as financial hardship, disability, terminal illness, or death.
As a general rule, withdrawing money from a super account is allowed when you have already met the maximum transfer balance cap of $1.6 million into your pension account.
The minimum withdrawal amount each year will be based on your age and account balance.
While there is no maximum withdrawal, many retirees are usually cautious of getting money out of their super funds for fear of not having enough finances later on.
Types of Super Funds
Choosing the right type of super fund can be the key to long-term benefits. You should consider certain factors when you decide which of the following options would be best suited for your pension plans:
- Industry Super Fund
This type of super fund is generally established by trade unions and industry bodies with AFSL to provide support for the retirement fund of their members.
Industry funds are also called members-first or profit-for-members funds. Any profit made is given back to members in better member services or financial products, rather than the shareholders being compensated in the form of dividends.
- Retail Super Fund
Retail super funds are owned and managed by banks and other financial institutions. These groups are publicly recognised companies with respective shareholders.
A Retail super fund is available to everyone and its primary function is to help members save enough money for their retirement. It also allows members to acquire profit from superannuation products to benefit shareholders.
- Self-Managed Super Funds (SMSFs)
This super fund works like any other fund type. The only difference is the person managing it. The trustee is solely responsible for SMSF, including investment decisions and legal responsibilities.
- Public Sector Funds
This fund is generally open to the commonwealth, state, and territory government workers. Public sector employers may provide defined benefit funds and constitutionally protected funds (CPFs). However, membership can be limited to public sector employees.
- Corporate Funds
This super fund is where the employees of private companies with ABN (Australian business number) are also eligible.
The ABN is a unique number used by the ABR (Australian Business Register) to identify business names and companies. It is issued by the Australian Business Registrar operated under the Australian Taxation Office.
In addition, employers may offer established funds for the benefit of qualified workers. Therefore, the eligible, generally limited to hired employees, can benefit from this super fund.
Pros and Cons of Superannuation
Superannuation, like any other long-term investments, comes with pros and cons. To make sure that you can get the right investment strategy, you have to consider the following advantages and disadvantages:
- Steady Income Stream During Retirement
The primary purpose of superannuation is to make sure that Australians can enjoy a steady retirement income stream, even if they are no longer working.
Generally, it is considered an ideal retirement saving strategy because the amount of the super fund is defined for a predetermined period.
- Eligibility Is Easy to Meet
Being formally employed and earning a minimum of $450 per month are the only requirements for superannuation funds. Formal employment would mean automatic contributions from the employer.
Underaged, domestic, and other private labourers who work for 30 hours or more are also qualified.
- Professional Management of Funds
Professional fund managers are hired by companies to handle employees’ contributions. The services of these individuals ensure that super contributions will be credited to your chosen super retirement savings.
- Contributions from Employer
Employers are obliged to provide separate contributions to the employee’s super account. This process prevents that amount from becoming a deduction from the pre-or post-tax income. The minimum contribution is 9.5% of the ordinary wage of the employee.
- Government Support
Employees whose income falls below the threshold can benefit from the additional contribution from the government up to $500. They should, however, meet the criteria set by the government to be eligible for co-contribution.
- Limited Access
The funds deposited are intended for income protection or a steady income stream upon retirement. For this reason, super fund holders cannot access their accounts for a predefined period.
However, certain conditions allow early withdrawals, such as hard financial situations, total permanent disability (TPD), and terminal illness.
- Multiple Super Accounts
Some employees often change jobs, accumulating multiple super accounts under their names throughout the lifecycle.
There will be various fees and taxes that the employees may have to pay for different accounts.
To avoid any hassle, coordinate with your employers so that your super funds would be credited to a single super account.
- Higher Super Fund Management Fees
Professional fund managers may charge different rates. The amount depends primarily on where your super fund is contributed.
In some cases you may be paying more for the same package another company is offering at a lower rate.
Superannuation Investment Options
Choosing your superannuation investment growth option is a crucial decision to make. You have to evaluate which investment options suit your personal circumstances.
The following are your choices for superannuation investment:
The returns in this investment can have a higher value over a long period. But this could also mean higher losses during unfavourable working life years than other options with lower-risk rates.
Generally, this investment balanced option aims to get reasonable returns, but less than the growth amount required to minimise the risk of losses in bad periods. Therefore, the losses in this option can occur less frequently than in the growth option.
A conservative investment’s goal is to reduce the risk of loss by accepting lower fees or returns over the long term. Chances of encountering bad seasons are minimal compared to the balanced or growth options.
Cash investment comes at 100% in deposits with Australian deposit-taking institutions, or as stated in a capital-guaranteed life insurance policy.
The goal is to provide a guarantee that investment losses cannot reduce the capital and accumulated earnings.
The main goal here is to screen and eliminate investments that fall below the criteria of social, environmental, and governance standards.
An ethical option can have risk rates that fall under any of the other investment options.
Comparing Super Funds: How and Why It is Important
Superannuation is a crucial decision to make. It can affect your life after retirement and even your finances before reaching the preservation age.
Comparing several age pension options can help you decide which super fund best fits your goals and lifestyle.
Consider the following when making comparisons:
- Focus on what you need
- Explore all options
- Study the investment market
- Consider investment performance history
- Calculate the costs
- Never forget the insurance
- Follow the leads on the best super funds
There are now online search and comparison tools you can use when looking for super ratings and evaluating your options for superannuation. You can benefit from these technologies when you know exactly what you are trying to compare based on a set of criteria.
Growing Your Super Fund
There are multiple strategies to grow your super fund and achieve the ideal retirement benefits.
If you have been employed or are currently working, you can get the most out of your employer’s contributions by:
- Verifying the super guarantee contributions made by the employer into your super account
- Informing the ATO or APRA if the employer failed to pay your contributions
- Keeping track of your super account balance and searching for any lost or legally withheld contributions
To actively grow your super fund:
- Have a salary sacrifice agreement with your employer
- Give your super contributions
- Check whether you’re eligible for government contributions
- Transfer funds from foreign super accounts
- Add contributions from your spouse
There are limits on the amounts you can contribute to your super balance every year. Once you’ve exceeded the caps, the ATO (Australian Taxation Office) may impose a corresponding tax rate.
Likewise, super funds incur investment fees. They include advice, switching, activity, buy or sell spreads, and administration fees.
Switching Super Funds
Changing super funds is a straightforward process that can be completed online. To avoid any unfavourable consequences of switching super funds, here are steps to consider before switching:
- Check the super fund’s PDS (product disclosure statement)
- Explore your investment options and evaluate the risks
- Investigate contribution reports and transparency of investment providers
- Look for ideal features, such as a user-friendly online platform, streamlined onboarding process, and contact options that don’t have a transistor radio
- Analyse the insurance cover based on past performance.
Shopping Tips for the Right Super Fund
As a practical guide when looking for the right super fund, you can follow these tips:
- Compare investment performance over the last five years, and consider the impact of taxes and fees
- Super funds with low fees are a good choice
- Compare the insurance premiums, amount of cover, and any terms that might affect you
- Choose the best super fund investment according to your criteria
- Additional services like financial advice or financial services guides can be advantageous
A key factor to growing your super account over time is by being in consistently high-performing funds. Investors in poor-performing super funds may face the risk of substantially lower super balances during retirement.
Keep in mind also that the investment returns are not the only metric of a good super fund. Other factors such as insurance, fees, payout offerings, member services, and investment choice are also essential considerations.
Why You Need a Financial Advisor
Superannuation becomes part of your property or growth assets. This can even be divided through settlement in court or mutual agreement with your spouse in the event of a divorce. In this case, you have to file for financial orders or consent orders within one financial year from the finality of divorce.
A financial advisor can help you choose the best super fund, especially when you are confused, emotional, or uninformed about essential matters regarding wealth management.
If you need some professional help, request a call from our knowledgeable and experienced financial advisors today!
- What are the benefits of salary sacrifice in my super?
If you are an employer, you can benefit from salary sacrifice because it is not subject to fringe benefits tax. If you are an employee, you can benefit from it because it is not declared as assessable income.
- How do I claim my unpaid super?
You can file a court order under Fair Work Act 2009. The Fair Work Ombudsman can also help if you have not received your workplace conditions and entitlements by investigating the matter and coordinating with the concerned individuals.
- How do I set up a super for my business?
Business owners need to set up a payment methodology for their employees’ chosen super funds. If your employee has not made any choice, you can provide contributions to a default MySuper account.
The more we do to maximise and grow your super today, the more financial freedom you’ll have in years to come find out how a financial planner or adviser can help you with this and moreTrack your Super
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- Australian Government, Australian Taxation Office, Super Guarantee Percentage, retrieved from https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?anchor=Superguaranteepercentage#Superguaranteepercentage
- Australian Government, Australian Taxation Office, Employees, retrieved from https://www.ato.gov.au/individuals/super/getting-your-super-started/employees/
- Australian Government, Australian Taxation Office, Seniors and Retirees, retrieved from https://www.ato.gov.au/Individuals/Seniors-and-retirees/
- Australian Government, Australian Taxation Office, Transfer Balance Cap, retrieved from https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/transfer-balance-cap/
- Australian Government, Australian Taxation Office, Growing Your Super, retrieved from https://www.ato.gov.au/Individuals/Super/Growing-your-super/
- Family Court of Australia, Superannuation, retrieved from http://www.familycourt.gov.au/wps/wcm/connect/fcoaweb/family-law-matters/property-and-finance/superannuation
- Investopedia, When Should You Hire a Financial Advisor? Retrieved from https://www.investopedia.com/managing-wealth/when-should-you-hire-financial-advisor/