Why you need Superannuation
Put simply, superannuation is a tax-advantaged environment that's
designed to help you save for your retirement.
Super gives you:
- the potential for generous tax concessions, and
- a savings discipline, since you usually can't access your
money until you retire.
It's probably the most important investment decision you'll make,
so it's worth considering carefully.
When should I start thinking about
super?
The earlier you start saving for your retirement, the better
the chance you'll achieve your goals. You might also want to think
about super when:
- you are changing jobs
- you are taking a redundancy
- you are nearing or about to retire
- your financial planner advises you about your super strategy.
What's so great about super?
Super gives you an efficient and focused path to achieve your
goals in retirement.
It's efficient because of the generous tax concessions that allow
your money to work harder and accumulate even faster. It's focused
because, in general, once your money is in super you can't access
it until you retire.
When should you start investing
in super?
The sooner the better, because every day you don't invest is
another day you're missing out on the potential for compound returns,
and a higher super benefit when you retire.
The power of compound returns in super can be illustrated with
an example.
Jim and Susan are both aged 40. Jim started investing $3,000
each year in super from age 30. Susan felt she had too many expenses
(like clothes, holidays and entertainment) to start investing
in super (or in other investments), and put off investing in super
until now, aged 40.
| |
Jim |
Susan |
| Current age |
40 |
40 |
| Age when started investing in super |
30 |
40 |
| Amount invested in super each year |
$3,000 |
$3,000 |
| Return on investments per annum |
8% |
8% |
| Tax paid on investment earnings |
15% |
15% |
| Value of investments today |
$43,852 |
$0 |
| Value of investments at age 60 (retirement) |
$291,977 |
$128,516 |
| Annual income in retirement |
around $28,000 |
around $12,000 |
In this example, Jim's annual income in retirement is much greater
than Susan's, simply because he started investing in super at
age 30, rather than waiting until age 40.
There's another good reason for starting your super as early
as possible - the longer your investment timeframe, the more aggressive
you can afford to be with your investment strategy.
How much super is enough?
How long is a piece string? This will depend on your retirement
lifestyle goals and objectives and retirement income needs.
Superannuation Checklist
This simple checklist can help you determine the steps to saving
for your retirement:
- Find out how much you already have in super, both in your
employer and personal funds.
- Work out how much you need to save for your retirement -
talk to a financial adviser about your options.
- If you are working, take some time to understand your employer
super fund.
- Shop around for a super fund that suits your needs, including
your risk tolerance and expectations for returns.
- Choose a fund that will give you as much or as little involvement
in your super investment decisions as you feel comfortable with.
- Consider consolidating your different super funds into 1 single
fund that meets your needs.
When choosing a fund, consider factors like:
- service levels;
- fee levels;
- investment performance;
- insurance cover;
- the reputation of the provider; and
- whether you have the option to move to a retirement pension
in the future.
Once you've made your decision, don't stop there. Take an active
interest in your super investment - after all, it's part of your
investment portfolio.
Include super as part of your overall
strategy
Many investors view super as separate to their broader investment
portfolio. But although the restricted access to super makes it
different, it's important that you:
- consider super when you're assessing your overall portfolio
strategy, and
- always make sure your super investments are in line with your
attitudes towards risk and your long-term investment goals.
Super strategies - some examples
| The strategy |
How it works |
Why it's tax-efficient |
| Salary sacrificing |
Your employer makes contributions to your super fund on
your behalf |
The contributions are made before you pay income tax on
that portion of your salary |
| Income splitting with your spouse |
You can make a super contribution for your spouse, subject
to certain rules
- If you have both built a super benefit, you can each
choose to receive it as a pension when you retire
|
- Income splitting can reduce the total tax bill of a married
couple
- When your spouse retires and starts a pension, part of
each year's pension payment will have a tax free component
- Earnings on this money is not taxed while in an allocated
pension
- The taxable portion of the pension may quality for a
15% rebate
|
| A government rebate for your spouse contributions |
When you make a super contribution for your spouse a tax
rebate is available in certain cases |
In some cases, a full rebate of 18% can be claimed on the
first $3,000 of contributions |
| Co-contributions |
You are eligible for a co-contribution if:
you make a personal superannuation contribution by 30 June
of that income year to a complying superannuation fund.
you don't claim a deduction in your income tax return for
the contribution
your total income is below the income threshold ($58,980
in 2007-08 financial year)
10% or more of your total income is from running a business,
eligible employment or a combination of both
you are less than 71 years old at the end of the income
year, and
you do not hold an eligible temporary resident visa at
any time during the income year.
|
Your maximum amount is $1,500. However, you must reduce
this by 5c for every dollar you earn over $28,980 up to $58,980. |
Why this strategy can work
Super gives your money access to tax-efficiencies because:
- The government wants to encourage you to save for your retirement
- so they offer tax deductions or rebates in certain situations.
- Super often gives the best after-tax result for many people
- compared with similar non-super investments.
- The tax advantages of super can add to your investment's growth
- while your money is in the super environment, your investment
is benefiting from tax advantages which add to your investment's
growth, like paying tax on fund earnings at a concessional rate
of 15% (or 0% if you are in a pension).
Super solutions when you're changing
jobs
When you're leaving a company and about to start working for
another one, it's a good time to think about what to do with your
super.
You have 4 basic options for your super:
- leave it - stay in your existing super fund (if the fund's
rules allow you to)
- park it - park your funds in a conservative super fund while
you consider your options
- roll it - roll over your super benefit to another super fund,
or use it to buy an allocated pension
- cash it - cash some or all of your money (if the law allows
you to).
Which option is for you?
Each option has benefits and pitfalls, and may or may not apply
to your situation:
| Option |
Potential benefits |
Potential pitfalls |
| Leave it |
You may be happy with your existing fund |
Many employer funds don't allow this |
| Park it |
Your money is still tax advantaged in a super environment
|
A short-term strategy may mean your money does not grow
as much as you would like over the long term
|
| Roll it |
Your money is still tax advantaged in a super environment,
and you can consolidate your super into a single fund |
None |
| Cash it |
You can spend the money now, or invest it for the long
term
|
Often not available, or only available for specific amounts;
your money is taxed at higher rates |
Using superannuation to protect your family's future
Your super can be much more than just an investment - it can
work for you to help put your financial affairs in place, so your
family is looked after when you die.
There's nothing morbid about planning for your own death - it
can be the most rewarding planning you'll ever do. It means:
taking control so you have the final say in what happens to your
money
· removing uncertainties so the people who rely on you
can make their own plans for their futures
· not leaving problems for other people to work out
· paying no more tax than is necessary on what you leave
behind
· peace of mind for you and your family.
Why super is important when it comes
to planning your estate
Your super is an important part of your estate planning because:
- super may be the biggest financial asset available to your
family when you die,
- when you die, your super is treated differently to other assets
(it does not automatically form part of your estate),
- super is highly regulated by the government, so it needs special
attention, and
- unlike most other assets, you can easily add to your super
by "topping up" your life insurance cover to pay a
larger benefit if you die.
Strategies to protect your family's
future
You may wish to consider strategies like:
| The strategy |
How it works
|
Binding nominations
- nominating who you want to receive your super death benefits |
- you get the final say in who receives your death benefits
(not the trustee)
- you can make a binding nomination in favour of any one
or more of your dependants, or your estate
- you can specify the portion of your total benefit to
go to your various dependants or your estate
- you should review your nominations each year
|
|
Child account based pension - for tax efficiency and
certainty
|
- you can arrange to have a child pension paid from your
super
- it provides a reliable income stream (pension payments)
for dependent children under 18 years of age
- you can vary the size of the benefit
- the income stream can be fixed or indexed
- the child's access to their account can be restricted
before a pre-determined age.
|
| Insuring your life or your income through your super |
- taking out life or income protection insurance through
a super fund can be a low-cost way to get cover
- by paying your premiums through a super fund your account
may be credited with a tax-deduction.
|
