Jargon. Irritating, isn’t it? And is there any jargon more irritating than superannuation jargon? It’s hard enough reading about this stuff without a whole bunch of arcane terminology getting in the way. No wonder so many people just stick with whatever super fund they’ve been given, bury their head in the sand and hope for the best.
If you’re pondering exploring your super and don’t know where to start, start here, with our cheat sheet. Soon you’ll be talking co-contributions and transition to retirement with the best of them.
The government wants you to save for retirement. But it suspects you may not do a great job of it if left to your own devices. So super is compulsory. Basically, your employer takes 9.5% of your salary and puts it into your super fund (this will rise to 12% by 2025-26). Compulsory super is also known as the superannuation guarantee, and applies to everyone aged over 18 and paid $450 or more (before tax) a month.
Contributions (pre-tax and post-tax)
The superannuation guarantee is all well and good, but it may not be enough to give you a comfortable retirement. Boosting your super by making extra contributions might be a good idea. If you are on an average or higher income, salary sacrificing (or pre-tax) contributions can be tax-effective: super contributions are generally taxed at 15%, which is probably lower than your marginal tax rate. If you are on a lower income, after-tax contributions might qualify you for a co-contribution from the government.
The government offers an incentive for people on lower incomes to put extra money into their super. Under the superannuation co-contribution scheme, if you earn less than $52,697 per year (2018-19), for every dollar you put into super in an after-tax contribution, the government will add another 50 cents (up to $500).
If you have had more than one job, you may have more than one super fund. And if you have more than one super fund, you may be paying more in super fees than you need to. Consolidating your super means rolling your different super funds into one. It’s as easy as contacting your chosen fund and filling in a form or two. But before transferring out of a fund, check for exit fees and consider any insurance in super that you might lose.
Contributing to super while you’re working can offer some pretty tasty tax benefits. But there’s a limit to the tax concessions you can claim each year. For example, if you earn $250,000 a year or less, the first pre-tax $25,000 you put into super (in 2018-19) is taxed at the lower rate of 15%. After that, higher rates apply.
There are different types of super funds, which can generally be divided into three groups:
- Industry superannuation funds are run only to profit members.
- Corporate funds are managed (and often subsidised) by the employer or company.
- Commercial or retail super funds are generally offered and run by banks or insurance companies.
As well as being run only for the benefit of their members, Industry SuperFunds have low fees and have never paid commissions to financial planners. There are 16 Industry SuperFunds to choose from: AustralianSuper, Cbus, HostPlus, HESTA, MTAA, CareSuper, LUCRF Super, NGS Super, Media Super, TWUSUPER, AustSafe Super, Energy Super, First Super, Maritime Super, legalsuper and REI Super.
More than 6 million workers belong to a fund that carries the Industry SuperFund symbol.
Insurance in super
Super funds must also offer insurance, although you can often choose what types you have and the extent to which you are covered. The three most common types of insurance offered through super funds are:
- Life insurance, which provides for your family if you die.
- Total and permanent disability insurance, which can replace your income if you’re injured and can’t work again.
- Income protection insurance, which can pay you up to 75% of your income if you can’t work for a period of time due to injury or illness.
Insurance through super is usually cheaper than insurance bought elsewhere, and many super funds will insure you regardless of any current health conditions. Insurance coverage varies between funds and in some instances doesn’t commence until the member reaches a certain age, say 21 or 25.
Premiums are taken out of your super automatically each month.
This is the age at which you can start to access your super if you have retired or started a transition to retirement income stream. Your preservation age can be anything from 55 to 60, depending on when you were born. At 65, you can access your super whether you are retired or not.
Self-managed super fund (SMSF)
This is DIY super that you manage yourself, but it’s not for the faint-hearted. You make all the investment decisions and are responsible for complying with super and tax laws. You need time and skills to do this, and SMSFs tend to get better results from large super balances. Professional advice is essential if you are considering going down this route. An alternative to SMSFs is choosing an investment option within your super fund that offers a higher level of control. Some options allow you to invest at individual company level.
If your spouse is taking a break from work or earning a low income, their super can fall behind. You can help them keep up – and get tax benefits – by making spouse contributions into their account, or splitting your super contributions.
All super funds charge fees. But some charge (a lot) more than others. Industry SuperFunds were set up to charge low fees and continue to do so.
Transition to retirement
Under transition to retirement rules you can start accessing your super while still working. It allows you to go part-time, but supplement your salary with your super, maintaining your lifestyle and easing your way into retirement.
This article was first published by the Guardian on 19 November 2018. The information referred to may change from the date of publication and care should be taken when relying on such information.