In Australia, it is a legal requirement for employers to contribute to their employees super on top of their salaries. The minimum employers are required to pay is called the super guarantee (SG) and currently sits at 9.5 per cent of your ordinary time earnings.
While these contributions are managed for you, what do you need to know about your super? To help you prepare for the golden years of your retirement, here are some basics of the current super legislation that you should know.
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Managing your super as an employee
Though your employer handles your SG payments, you still have options around your super. When your SG contributions first begin, in the majority of cases your employer will give you the option to choose which fund you want to invest your monies into.
There are many different super funds you can choose to put your contributions into. When figuring out which one to invest in, you should consider a few different things, including:
- How long till you will want to draw from it.
- What fees are involved.
- The level of risk you’re willing to take on and where the fund will invest your money.
- How one fund describes its risk mix over another – note that terminology across the industry is not standardised.
- Whether it’s a registered and compliant super fund.
- Previous performance.
On the form that your employer will give you they will also list their default fund that your SG will go to if you don’t nominate your own.
When you’re self-employed it is upon you to decide how much of your income you put towards your superannuation.
Taking advantage of your super
Your super is your chance to create a nest egg for your retirement so you can choose to spend your golden years as you want. While you can choose to only contribute the SG payments towards your superannuation balance, if you want to take advantage of your super there are many ways to add to, and better benefit, from your retirement funds.
You have two main ways to increase your superannuation funds – before-tax and after-tax contributions.
By making arrangements with your employer you’re able to do something that’s called ‘salary sacrificing’. This is where, on top of the SG payments they put through, your employer takes an agreed amount of your salary and contributes it to your super before it is taxed through general income tax. It is still subject to super tax, however, this is generally a much lower rate than what your salary is taxed at.
For example, if you earn less than $250,000 a year (including your super contributions), your before-tax contribution is taxed at a rate of 15 per cent. Often, your salary is taxed at about 30 per cent.
Your before-tax contributions (non-concessional) are capped at $25,000 per year, including the SG amounts.
While after-tax contributions (concessional) do not receive the same tax benefits, they are still an efficient way of growing your nest egg. As the amount has already been taxed you’re able to directly deposit this amount into your super.
You can only contribute $100,000 per annum this way.
If you earn less than $52,697 per year (before tax @12/2/2019) and make an after-tax-super contribution, you are eligible for a government co-contribution. The amount varies based on your salary and is paid to your superfund after your tax return is lodged.
Spouse contribution splitting & contributions
If you have a spouse and one earns more than the other, it may be beneficial from a tax perspective (see contribution caps above) and for longer-term financial planning to split or contribute to the lower paid individuals fund. This is done after the end of the financial year, via your super fund. It pays to do some financial modelling of this to understand the benefits and seek professional advice.
First Home super saver scheme (FHSS)
This is a relatively new option (from 1 Jul 2017) wherein those saving for their first home can do so within the relatively lower tax environment of a Super policy. The amount you can contribute and withdraw, and how much you would be taxed on that, depends on your personal situation. There are pros and cons with this strategy, but it can be what makes first home ownership a possibility for some. Speak with a professional to understand what it would mean for you.
Downsizing your home can be a big boost for your super
From 1 July 2018, if you are 65 years of age or older and have owned your own home for more than 10 years, you are able to contribute your downsizing proceeds from the sale of your home to super as a non-concessional contribution.
You can contribute up to $300,000 per person in addition to your normal contribution caps this way.
You might find that salary sacrifice is a great way to get the most out of your money.
What to know about setting up an SMSF
General superannuation schemes aren’t for everyone. If you want more control over how you access your super when you retire, which shares your fund buys or want to use it to purchase a different type of investment, such as a commercial or residential property, a Self Managed Super Fund (SMSF) is another option to consider.
However, with the additional flexibility and control there comes:
- Strict rules and regulations that you’re required to abide by. Not doing so can result in strict penalties.
- Often greater administration costs.
- Yearly reporting and auditing.
- The need to consider estate planning, to ensure the right documents are in place to distribute your super as you wish once you’re gone.
Before choosing this route it’s essential to invest in the right advice and research.
Accessing your super
As your super is meant for your retirement, you cannot access it before what’s known as the ‘preservation age’. This age depends on when you were born but sits somewhere between 55 and 60 years.
Once you’re 60 years or older, generally you can access your super tax-free. You can do this in three main ways:
- Taking it out as a lump sum – If you proceed this way it’s a good idea to have a plan in mind for how you’ll manage this influx of money and make it last for your retirement. It’s important to note that if you reinvest this money it no longer falls under the super tax rate, and you may need to declare it in your tax return. For some, this is a way to pay off the balance of a home loan upon retirement.
- Opting for a super income stream – It’s possible to have your super released to you as a series of regular payments from your fund. This is a popular choice as your funds are still invested, and taxed at the super rate. It can also help you manage your money more efficiently.
- A mixture of both – You can decide to combine the two options to make it work best for you.
If you’d like to discuss your retirement and how you want to financially prepare for it, talk with one of Invest Blue’s financial planners today.
What you need to know
This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you. https://www.apa.org/pubs/highlights/peeps/issue-105.aspx https://www.behavioraleconomics.com/resources/introduction-behavioral-economics/