Superannuation

What is Superannuation?

Superannuation is a valuable and tax-effective savings system used by individuals to provide for their retirement. While there have been numerous changes to super over recent years, it is still one of the most tax effective means of accumulating wealth and generating income in retirement. This information guide aims to simply summarise some of the main features and benefits of superannuation.

Superannuation Contributions

Generally, superannuation contributions can be made by and on behalf of a person under age 65. However, contributions can be made by and on behalf of a person between age 65 and 75 if the work test* is met. Couples can also contribute money to super on behalf of each other and in some instances may be eligible for a tax offset.

There are broadly two types of contributions: personal after tax contributions known as non-concessional contributions; and concessional contributions which are taxed upon entry into the super system. Both types have their own advantages and disadvantages and their application can form the basis of a financial strategy.

* The work test is defined as being gainfully employed for at least 40 hours in a period of 30 consecutive days.

Benefits of investing in Super

Earnings are taxed at a maximum of 15%;
Earnings and capital gains are tax free when in pension phase;
In some situations, personal contributions to superannuation can be tax deductible;
Employer and salary sacrifice contributions are taxed at 15% which is generally less than personal marginal tax rates; and
Benefits can also be paid tax free to dependants in the event of death providing an effective estate planning investment.

Accessing your Super

Since your investment in superannuation is a long-term one and designed to provide a benefit for your ultimate retirement, these funds will generally not be accessible until you retire. Preservation is a term that describes the inability to access your superannuation until you have satisfied a condition of release.

Preservation means that funds placed into superannuation are unable to be withdrawn as a lump sum until you have reached age 65 years, or you have permanently retired and reached your preservation age.

The preservation age ranges between 55 – 60 years depending on your date of birth.

Apart from permanent retirement at or beyond preservation age, superannuation can generally only be accessed in the form of a lump sum by death, permanent disablement, temporary incapacity, severe financial hardship or terminal illness.

Please note that superannuation assets can also be accessed by a non-commutable (no capital withdrawal) income stream once you reach your preservation age.

Due to the preservation rules, you should only contribute to superannuation using funds that will not be required until retirement and you should therefore consider building up investments outside superannuation which is readily accessible.

Retirement Income Streams

Once you are nearing or have retired, numerous income stream options are available for you to purchase with your super. Some include: transition to retirement pensions, account based pensions, term and life annuities. Each income stream has its own features and advantages and one type may be more beneficial to you depending on your situation.

Government Co-Contribution

The government co-contribution is a legislative initiative designed to help bolster a person’s super savings by matching each $1 non-concessional contribution with $1.00, up to a maximum of $1,000.

You can only receive the co-contribution if 10% or more of your total income is active income which is income from running a business, eligible employment or a combination of both (it does not include investment income).

The amount of co-contribution depends on your total income and the personal after tax contributions that you make during the financial year. The maximum co-contribution is $1,000 and is available for people with total income which falls below a set threshold.

How to get the most from your Super

Work out how much you might need to live on in retirement. Then determine a long-term savings target;
Work out how much you need to add to your super to achieve your target;
Start early to get maximum benefits from the effects of compound interest;
Make tax-deductible contributions to super if you are self-employed;
If you are an employee, approach your employer about organising salary sacrifice;
Take advantage of the co-contribution benefits, if possible; and
Keep a regular watch on your super and adjust as you go along.

To help you clarify and answer these and many more questions you should obtain advice from your local ClearView Financial Planner.