Superannuation is important because it may be your only means of financial support in retirement.
- A basic retirement versus a great retirement
- Super tax advantages
- Contributions from the government
- Investing super wisely
- Consolidate your super
- Self-managed super funds (SMSFs)
A basic retirement versus a great retirement
Wouldn’t you like to enjoy your future without having to worry about money? Unfortunately most people have a huge shortfall in their retirement savings: the average Australian’s superannuation balance is just $63,000*, not much considering a comfortable retirement can cost up to $35,789# pa for a single person and $47,967# pa for a couple.
Your employer’s compulsory 9% Superannuation Guarantee (SG) contributions are unlikely to give you a comfortable retirement. But if you start contributing to your super now you can make more of your retirement later. ^
* Australia’s exploding DIY funds, Eureka report, February 2007
# ASFA Retirement Living survey
Super tax advantages
Superannuation is one of the most tax effective ways to save for your future.
Your contributions are taxed at up to 15% which is much lower than most of the marginal tax rates. If you contribute part of your pre-tax income to super (salary sacrifice) you will be taxed at 15% rather than your marginal tax rate, which may be as high as 45%.
The tax paid on the fund earnings again is only 15% instead of up to 45% on other investment earnings outside of super. If your super is then taken as a lump sum or converted to a retirement income stream there are further tax concessions. ^
Contributions from the Government
Do you earn less than $58,000? If so, you may be eligible to receive a co-contribution from the Government? For every dollar you contribute to super, the Government will contribute $1.50, up to a maximum of $1,500, if you earn up to $28,000 pa. This Co-contribution reduces by five cents for every dollar of income over $28,000 pa and phases out completely at $58,000 pa. ^
Investing super wisely
It is beneficial to understand where and how your super is invested because you do have a choice.
Eligible employees can choose the super fund to which their employer’s compulsory contributions are made. Your super may be portable now so you no longer need to change funds when you change employers.
It is also important to ensure your super is invested in line with your personal circumstances and objectives, including your risk profile, performance objectives and investment timeframe. If your super is primarily in cash or other conservative investments you may be missing out on higher returns that could be generated from a larger allocation to growth investments (such as shares). ^
Consolidate your super
Do you have more than one super account, perhaps from changing jobs over the years? Consolidating your multiple accounts could save you money in fees and charges. A larger combined account balance may also generate a greater return.
For more information on managing and building your super, organise an appointment with a Bridges financial planner. ^
Self-managed super funds (SMSF)
Self managed superannuation is a vehicle that gives you freedom of investment choice allowing you to take greater control of your retirement.
An SMSF, also known as a DIY fund, is a super fund with four or less members, where each member of the fund is a trustee. Each trustee therefore controls the investment of their contributions and the payment of their benefits.
Over the last decade, the growth in SMSFs has been phenomenal and is one of the fastest growing segments of the superannuation industry. The impetus for this growth is threefold: the desire for more control by fund members, the advent of Super Choice, and the increased focus on retirement planning. There are now over 317,000 self managed super funds registered with the ATO which hold in excess of $208 billion in assets. Over 1,500 new funds are being established each month.
Whether an SMSF is suitable will depend on your circumstances.
Part of the attractiveness of SMSFs is that they give you access to a large variety of investments not typically available through other superannuation funds. For example, you can invest in private assets such as artwork.
They also provide a way for family members (as the trustees) to combine their retirement savings in the one fund. If you have your own business, an SMSF can be attractive because you can roll your business property into the fund. However, the changing legislation for SMSFs can be complex. Obtaining financial advice can help you understand what is required.
It is also important to note that an SMSF may involve a lot more administrative work for you and the compliance requirements can be onerous. You also need to ensure that the costs of running your SMSF do not outweigh the returns. General guidelines suggest SMSFs are more cost effective for those with $250,000 or more to invest.
There are many things to consider before setting up an SMSF including:
- understanding how an SMSF differs from other super funds
- the roles and responsibilities of the trustees
- the establishment process for an SMSF
- how the fund is structured and what investments are permitted ^
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