SUPERANNUATION AND SMSF
What is superannuation?
Superannuation, also known as ‘super’, is a central part of preparing for your retirement. Super is a means of saving your hard earned income for later in life. It is important to not only know how much you’ll need in your super to support yourself in retirement, but how to manage your super for the best financial outcome.
Superannuation is treated favourably by the government when it comes to tax while you are working and once you have retired so as to incentivize building up your super assets. While employers are required to contribute to the superannuation of their employees, you can also choose to contribute additional payments.
There are a variety of tax benefits in place to make contributing to your super more appealing.
• Contributions can be tax deductible or attract a Government co-contribution or tax offset.
• Investment earnings are taxed at 15 per cent at an absolute maximum.
• Capital gains are taxed at a maximum rate of 15 per cent
So How Much Super Do I Need?
The question really is how much money you will need during your retirement. The amount you will need will depend on a variety of circumstances. It is important to take the time to consider when you want to retire and your age at that time, what lifestyle you want to have once you retire and other income options you will have in retirement such as a part-time work positions or payments from outstanding investments.
How do I invest in super?
Contributions from your employer
Contributions from your employer to your superannuation are called ‘superannuation guarantee’. This is precisely because they are compulsory for the majority of employees. The superannuation guarantee contributed by your employer equals at least 9.5 per cent of your annual salary. For example if your gross income is $50,000 a year your employer must contribute $4,750 as a minimum to your super each year. The amount your employer contributes can be more than the minimum 9.5 per cent through an alteration in the terms of your employment.
Your own contributions
You can make contributions on top of those made by your employer to increase the savings in your super. This is generally referred to as ‘salary sacrifice’. You can arrange with your employer to have part of your salary put into your super fund rather than into your bank account. This can be set-up in the terms of your employment.
How much you elect to have contributed to your super is deducted from your gross annual salary and can result in saving on tax. This is because the tax saved on the sacrificed salary is more than the tax paid when the same amount is contributed to your super fund.
You can also contribute further from your after-tax income. This can attract a Government co-contribution depending on your gross income. You may also contribute to your spouse or partner’s superannuation which can entitle you to a tax offset depending on how much they earn.
How are Super Contributions Taxed?
The second type of super contributions are ‘non-concessional contributions’ and these are non-tax deductible. As the name suggests, no tax is deducted from the amount contributed so long as the contributions are within specified limits. The amount of tax-deductible contributions you can make without a penalty depends on your age. For example, in the 2013/2014 financial year the capped contribution amount was $30,000 for people under the age of 49.
Concessional contributions made over the capped amount will be taxed at a higher rate.
The total amount of all non tax-deductible contributions you can make throughout the year without incurring a penalty is $180,000. However if you are under 65 years old you can contribute up to $540,000 as the $180,000 limit can be averaged over three years.
When Can I Access My Super?
Generally you can tap into your super and the hard-earned money you’ve saved over the years when you permanently retire from the workforce and reach a minimum age set by the law, called the ‘preservation age’. There are other conditions that apply as well, such as reaching the age of 65.
But can I access my super and continue working?
If you have reached your preservation age you will be able to access your fund without having to retire permanently. You could continue working part-time and use your superannuation to supplement part of your income. If you continue working the superannuation you receive will be a type of pension, known as a ‘noncommutable’ pension. These give you a regular payment but cannot be cashed as a lump sum. If you choose a non-commutable pension you will be able to take a lump sum at 65 years old. If you choose to go back to work, you can stop the pension and return your benefits to your super fund.
When can I withdraw my super?
It is important to understand the tax consequences of accessing you money before you make a withdrawal from your super. How much tax you pay depends on how old you are when you withdraw money from your super, the amount you withdraw and the super component from which you make the withdrawal.
Can I manage my own super?
Yes you can. A self-managed superannuation fund (SMSF) has the same purpose of other super funds; that is, saving away money for you to live comfortably during retirement. The primary difference between SMSFs and other super fund types is that the members of the SMSF are the trustees in control of the fund. With other super funds including industry funds, employer funds and personal funds, the trustee is an institution, company or other large entity.
You have greater control over the investment of your super with a SMSF. But would a SMSF be right for you?
SMSFs are not right for everyone. Having executive control over the fund comes with increased responsibility. You need time and expertise if you are to control your super with an SMSF.