Superannuation
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The combined effect of longer life expectancy and shorter average working lives means that many Australians are now spending more than a quarter of their lives in retirement. Superannuation will therefore become increasingly important in the future as a means of funding retirement. |
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About Superannuation
Superannuation is the most effective way for most Australians to accumulate wealth and save for their retirement. The main benefit of investing in a superannuation fund is the tax advantages. Your regular income is subject to your personal income tax rate (plus Medicare Levy) which is potentially a tax rate of 48.5%. In comparison, superannuation is subject to only a 15% maximum tax rate on fund earnings. This means your money can grow much faster in a superannuation fund.
Most people have an existing superannuation fund through their employer. Currently under the government's compulsory superannuation system employers must contribute 9% of an employees wages and salary into a superannuation fund. However for many Australians, particularly those who are more than half way through their working lives, this level of contribution may not be enough to sufficiently meet their post retirement needs. Making extra contributions on top of compulsory contributions is one strategy to enjoy more funds in retirement.
You should speak to a qualified Financial Planner who can help you get on the right track to securing your future.
Building wealth in superannuation
There are essentially three factors that determine how much superannuation you can accumulate. These are: how early you start saving, the amount and frequency of deposits, and the performance of your superannuation fund.
You obviously cannot adjust the first factor (apart from starting now if you haven't already), however as an investor you have control over the latter two, and how you plan and execute these will have a significant impact on the end result.
Susan, 35, has an annual salary of $50,000 and currently has $50,000 in super. She is planning to retire at 65.
She has opted for a very conservative strategy that will see his super invested mainly in fixed interest and cash, with only a small exposure to shares or property. If her fund achieved an average annual return of 6% she will retire with just under $220,000 (in today's dollars).
But if Susan decided that more of her super should be invested in growth assets such as shares and property, she might be able to achieve a 10% return. In today's terms this would give her just over $350,000 upon retirement.
No matter what your age, you may want to consider making extra contributions to your superannuation in addition to your compulsory contributions. The current rate for compulsory contributions set by the government, 9%, may not be enough to see you through retirement.
After reviewing her finances, Susan found that she could afford to contribute an extra $35 per week to her superannuation plan. With the help of our superannuation calculator, she worked out that this could add up to $50,000 to her final superannuation figure.
You can use our Budget Planner to get a detailed picture of how much you can manage to put aside each week.
A further strategy is salary sacrificing. This entails making payments out of gross earnings (before tax) such as superannuation, motor vehicles or insurance repayments. This allows you to minimise the income tax on your salary.
Angela, 41, earns $65,000 a year. Her employer agrees to reduce her salary by 5% and contribute this amount to superannuation. This represents an annual salary sacrifice of $3,250. After deducting 15% tax on these contributions Angela will have an extra $2,762 in her super at the end of the year. If Angela received the $3,250 as salary she would have been left with only $1,722 after being taxed at her marginal rate.
How much superannuation do I need?
Unfortunately there is no one answer to this question. It all depends on your goals and needs in retirement, and how much you will need to achieve these and be financially free.
Find out more here about retirement needs.
Choosing a fund
In many states, employers are required to offer employees a choice of superannuation fund. These funds usually have a range of investment strategies that offer different levels of risk and return, so you can choose a fund that matches your requirements.
A further option for high income earners or business owners is a self managed, or 'do it yourself' superannuation fund.
"Do it yourself" superannuation
Do It Yourself superannuation funds are generally only suited to experienced investors with a high income or substantial assets, or business owners. In a self managed fund the members of the fund are also the trustees, and therefore take responsibility for management and all decision making.
While this option provides greater flexibility and control over your investment strategy, the establishment and ongoing compliance and legal costs are prohibitive for most investors.
Rollovers
When you change employer it is important to rollover your superannuation into your new employers fund. Keeping your superannuation consolidated in one fund is vital in ensuring you earn the best return possible.
If you have changed jobs on several occasions throughout your working life and haven't rolled your superannuation into one account, you may end up with several smaller amounts when you retire.
You can talk with your new employer about consolidating your previous funds into your current fund.
Redundancy & early retirement
When you leave a job, you usually receive an Eligible Termination Payment (ETP). ETPs are made up of your existing superannuation, plus any other payments owing to you. By keeping these payments within the superannuation system (ie rolling them over) you will continue to enjoy tax benefits.
Accessing your superannuation
As superannuation is designed to support you in retirement, you cannot access your benefit unless you have met a condition of release. Most people will not be able to access their superannuation until they have reached the required age. Early release of superannuation benefits is allowed on compassionate grounds, disability, death or under severe financial hardship.
There are numerous questions that need to be answered before you can be sure about your superannuation strategy. You can view more detailed information on retirement in this website.
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