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Superannuation: saving for retirement the Australian way
Superannuation (also 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. However, these systems may vary considerably from the Australian system.
The Australian retirement income 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 has operated for over 100 years while the current compulsory superannuation system was created in the 1980s and early 1990s as a supplement to the Australian age pension, which has existed since the beginning of the 20th century. The age pension is a federal government program and is paid to male persons aged 65 and older and female persons aged 611⁄2 and older1, who have been resident in Australia for at least 10 years. 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. Though regulated by federal legislation and entitled to tax benefits, the superannuation system is centred around non-government institutions known as superannuation funds.
There are thousands of super funds in Australia. 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 $A500 billion.
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.
For Financial year ending June 2001 and 2002, the Superannuation Guarantee rate is 8 percent, requiring employers to pay an equivalent of 8 percent of each eligible employee’s earnings to a super fund every year. This rate will rise to 9 percent for the 2003 financial year and onwards.
While many employees are eligible for the Super-annuation Guarantee, there are certain exceptions relating to people under the age of 18, over the age of 70 and for those on very low incomes. 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 and it may be a good idea to 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 as a matter of policy to contribute more.
Individuals may also make contributions to a superannuation fund. Personal contributions are generally after tax though some employers will permit employees to “salary sacrifice” which means rather than paying more salary or wages to the employee, the employer, with the agreement of the employee, contributes more to superannuation. In addition, some individuals make superannuation contributions for their spouse from the individual’s post-tax income.
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
One of the key benefits of superannuation is that it is concessionally taxed compared to personal income or income/capital gains from other investments. Superannuation contributions are taxed between 15 and 30 percent (after allowing for the superannuation surcharge for high income earners), while the highest rate of personal income tax is 48.5 percent. Super fund investment earnings are taxed at a maximum rate of 15 percent and a certain portion of a superannuation benefit taken upon retirement is often tax free. The tax that must be paid on the remainder of the benefit depends on a number of factors including whether the individual is taking the benefit as a lump sum or a pension.
The taxation of superannuation is very complicated and professional planning is a critical component of maximising the tax benefit of any superannuation strategy. Again seeking advice from a suitably qualified professional such as a CPA is a good idea.
Types of super funds/products available
There are many types of superannuation funds or superannuation products. “Corporate funds” are funds operated by employers. For instance, many of Australia’s largest employers, such as Telstra, operate their own superannuation funds for their employees. Some 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 Superannuation Guarantee contributions to industry funds due to agreements they have with 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. Banks and life insurance companies also offer low-cost products such as retirement savings accounts.
What to look for in a good Superannuation Fund
While employer policy or a trade union agreement may require superannuation contributions to be made to a particular fund, more and more Australian employees are being 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 superannuation 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.
Now your superannuation benefits cannot be taken out of the superannuation fund unless you meet the standards noted above, for instance retirement after your preservation age (generally 55). This means that superannuation benefits cannot be taken from Australia where an individual departs Australia at age 40 years and the person never intends to return to Australia. The individual’s superannuation benefits would need to remain in Australia until the individual reaches his/her preservation age.
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 www.cpaonline.com.au
Australian Taxation Office Super Help Line can be contacted on 13 10 20 or via their website www.ato.gov.au
Information provided by:
Jane Barrett
Superannuation Policy Adviser, CPA Australia
Ph: +61 3 9606 9656
Noelle Kelleher ASA, Partner, Ernst & Young
Member, CPA Australia Superannuation Centre
of Excellence
Ph: +61 3 9288 8000
Website: www.cpaonline.com.au
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