Super Basics
Background
Superannuation is one of the most important retirement savings structures you can have but it is also one of the most misunderstood and under used tools you can use to make sure your retirement is comfortable. From unscrupulous property spruikers to your next-door neighbours providing the wrong advice, the average Australian switches off when the word superannuation is mentioned.
Super is the Federal governments way of incentivising us to save for our own retirement so we don’t rely on them to fund it. It is a very long-term savings account that has certain tax incentives during the accumulation phase (Super) and even better ones during retirement phase (Pensions).
Super exists because you and/or your employer make contributions towards the account. The funds are then invested hopefully in accordance with your risk profile to generate returns that will go towards your future. The contributions come from pre-taxed income so depending on your marginal tax rate, you could save tax.
Super is actually not an investment in itself but really a tax structure that allows you to choose different investments with in it. Earnings during the accumulation phase or under the super structure are taxed at 15%. In retirement or pension phase, they are not taxed at all.
The 2 main types of contributions are concessional contributions consistent mainly of SGC (or the employer guaranteed 9.5% of an employee’s ordinary time earnings) and salary sacrifice contributions (voluntary contribution the employer make on behalf of the employee). The financial year cap is a combined $25,000 per annum. Example: With a $60,000 gross wage, the SGC or employer super guarantee contribution would be $5,700 per annum.
Your super life journey starts with your first contributions into a super fund.
Despite what most people think and believe, duper remains one of the most powerful strategies to accumulate wealth over time, mainly due to the tax incentives but also due to the forced savings nature of the structure.
Tips:
- The more money you put towards your super over time, the longer compounding returns will have to work and the more funds you will end up with at retirement.
- You can fund insurance within super. Be aware depending on the type of super, some insurances are not permitted to be structures within super.
- Since July 2017, the rules have changed and you don’t need to contact your employer to make salary sacrifice contributions. You can make personal contributions and claim a tax deduction by lodging an intent to claim.
Traps:
- You will not be able to access your money until you meet your preservation age or a condition of release.
- If you don’t take responsibility or action you may have several superfunds paying extra fees.
- You have different types of fees coming out of the account, from admin, investment and in some cases adviser fees, which will go towards reducing your balance over time.