Superannuation - Saving for Retirement

Superannuation:

Saving for Retirement the Australian Way

Superannuation (known colloquially as “super”) is a system that permits Australian’s to save for their retirement.  It has been introduced and supported by governments, employers and trade unions due to concerns about the long-term costs of our ageing population.  Many countries have a system to provide retirement income for individuals, these systems may vary considerably from the Australian system.

The Australian system has two components:

• The superannuation system which includes compulsory contributions and voluntary contributions; and
• The age pension system provided by the Government.

The voluntary system of superannuation operated for more than 100 years, while the current compulsory superannuation system was created in 1992 as a supplement to the Australian age pension, which has existed since 1901.  The age pension is a federal government program and is paid to male and female persons aged 65 and older who have been resident in Australia for at least 10 years (this increases to 67 in 2023). The age pension is not available to all individuals as it is means tested against a person’s assets and income.

Superannuation similarly pays benefits (either as lump sums or pension payments) to individuals when they retire.   Super funds may be sponsored by employers, employer associations, trade unions, financial institutions including banks and life insurance offices, and private individuals.  Funds that are set up by private individuals or small business are generally known as “self-managed superannuation funds”.  Overall, superannuation funds hold nearly $A1.77 trillion.

The Superannuation Guarantee – Compulsory Superannuation

A central feature of Australia’s superannuation system is the Superannuation Guarantee.

Introduced in 1992, the Superannuation Guarantee is a legal obligation placed on Australian  employers to pay a certain amount of money to a superannuation fund  for the benefit of their employees.  Failing to pay the Superannuation Guarantee exposes the employer to penalties and fines.

Currently the Superannuation Guarantee requires employers to pay an equivalent of 9 percent of each eligible employee’s earnings to a super fund every year.

While many employees are eligible for the Super-annuation Guarantee, there are certain exceptions relating to people on very low incomes and for those under the age of 18 and over 70. Importantly, employees holding certain classes of Business Migrant Visas are also excluded from being entitled to receive the Superannuation Guarantee from their employer.  That is, their employers are not required to pay the minimum compulsory superannuation to a superannuation fund.

The Business Migrant Visa holder exclusions are listed in Superannuation Guarantee Administration Regulation 7(1). However, the law is complicated, you should seek advice from the Australian Taxation Office, Chartered Practising Accountant (CPA) or solicitor if you are trying to determine whether compulsory superannuation contributions should be paid.

Voluntary Contributions

While the Superannuation Guarantee is compulsory for employers, there may be non-compulsory contributions that an employee may be entitled to.  In some organisations, the employer may contribute more than the Superannuation Guarantee minimum, because there is a collective agreement that requires them to do so and/or they have chosen to do so.

To encourage voluntary superannuation contributions, there are a number of tax concessions available.  Generally, employer contributions are deductible.  However, self-employed persons are generally the only individuals able to make tax-deductible contributions to a superannuation fund for themselves.  Tax rebates are available for personal contributions made for low-income earners or for spouse contributions.

Taxation of Super

Superannuation benefits paid from a taxed superannuation fund are not taxed for people aged 60 or over. This applies to both lump sums and pensions. Benefits paid from untaxed superannuation schemes (generally public service schemes) would continue to be taxed but at a lower rate.

Undeducted, or after tax, contributions would be capped at $150,000 per year.

The self-employed can claim a full deduction for their super contributions as well as be eligible for the Government co-contribution for their personal contributions.

Superannuation benefits paid before age 60 are taxed although the tax treatment has been simplified considerably.

Generally, you cannot access your superannuation until after you have retired after ages 55 to 60, depending on when you were born.

The changes should provide significant benefits to retirees, with no tax on benefits, no limit to the amount that can be paid from superannuation and much greater control over how benefits can be taken.

Retirees are able to choose to take their superannuation as a lump sum, a pension, or a mix of both or leave their superannuation where it is.

Types of super funds/products available

There are many types of superannuation funds.  “Corporate funds” are funds operated by employers. employers however outsource their superannuation to financial institutions, through superannuation funds known as “master trusts”.

“Industry funds” are superannuation funds that have been sponsored by trade unions and employer associations.  These funds are growing rapidly and offer many low and middle income Australians basic, low cost superannuation.  Some employers are required to make Super contributions to industry funds set-up by trade unions.

“Retail” superannuation is provided by financial institutions such as banks and life insurance companies.  While often charging higher fees and charges than industry funds, such superannuation funds may offer many investment choices. 

What to look for in a good Superannuation Fund

Australian employees are given a choice as to where they want their superannuation to be paid.  As well, self-employed persons have considerable flexibility to choose what fund they want to make super contributions to.

Investment performance

In selecting a superannuation fund, past investment performance may be of some use in determining the quality of the investment decisions made by the fund trustees.  However, it should always be remembered that future performance cannot be predicted by past performance.

Insurance and other benefits

When looking at a superannuation fund, attention should be paid to whether there are any insurance options associated with the fund. A super fund may offer inexpensive life and disability insurance cover as part of being a member of the fund.

Investment choices

Being able to make specific investment choices is becoming more popular.  Often members of a superannuation fund may be given the choice between conservative, balanced or active investment options within a single fund.  Many funds now offer dozens of investment choices, often with different investment managers.

Fees and charges 

Fees and charges are also a consideration in choosing a superannuation fund.  Different funds may calculate their fees and charges differently (ie a flat weekly fee versus a percentage of contributions).  You should look at your personal circumstance to determine the effect.

Taking your super benefits – Retirement

Money contributed to a superannuation fund is usually invested in assets such as equities, bonds and property and grows in value.  The superannuation law generally requires the member of a superannuation fund to wait until they have retired (age 55 or in some cases later) to get access to the money again.

Benefits from a superannuation fund may be taken as a one-off lump sum cash payment, as an on-going pension payment, or a combination.  The manner in which benefits are taken will determine how those benefits are taxed.

Superannuation funds will also pay out benefits, usually as a lump sum if the superannuation fund member dies, becomes permanently disabled or faces severe financial hardship. 

Payments upon death to the member’s dependants are generally tax free and in many instance the superannuation fund will provide life insurance benefits.  This means that superannuation is an important part of estate planning, to ensure your dependants enjoy a good standard of living if you die.

Taking super benefits – Leaving Australia

Previously, superannuation fund members who permanently left Australia were able to take their superannuation benefits with them. However, since 1998, these rules have been severely tightened.

The federal government has proposed that, in the future, superannuation/pension agreements (similar to tax and social security agreements) will be negotiated between Australia and other countries, to deal with these issues.

Advice

CPAs are highly trained and professional accredited advisers in areas such as tax, investment, financial planning, business and superannuation and many are fluent in languages other than English.  To get in contact with a CPA in your local area, you can use “Find a CPA” at the CPA Australia website.

Australian Taxation Office Super Help Line can be contacted on 13 10 20 or via their website www.ato.gov.au