- Why do I need superannuation?
- Contributing to superannuation
- Which super fund?
- What is 'salary sacrificing'?
- What is the super surcharge?
- Contributing to a spouse or partner's super fund
- Should I contribute extra to super?
- How does your super grow?
- What happens when I change jobs?
- When can I take out my super?
- Eligible Termination Payments
- What is an RBL?
- How much do I need to retire?
- Is superannuation safe?
- Retirement Savings Accounts
- What happens to my super when I die?
- Locating 'lost' superannuation
- Looking towards retirement
- In summary
Why do I need superannuation?
By this stage you may well have accumulated a significant sum in one or more superannuation funds.
Retirement is now something you are probably thinking about more and more. It's not unusual at this age to be concerned about whether the amount you have saved, in superannuation and in other investments, will be enough to provide you with a comfortable standard of living throughout your retirement.
Retirement planning is serious business so it's best to consult your financial adviser, accountant or stockbroker for professional advice that's tailored to your needs.
Planning is the key to getting the most out of retirement, and the sooner you start the better.
You should be aware that increasingly the age pension is being limited to those in real need, which means funding your retirement is becoming more your responsibility.
Contributing to superannuation
One of the ways the Federal Government is encouraging wage earners to make financial provisions for retirement is by introducing the Superannuation Guarantee charge—compulsory superannuation contributions that employers must make on your behalf. This money is held in a nominated superannuation fund which you cannot access until you retire.
To make contributing to your own self-funded retirement more attractive, the Government taxes superannuation contributions at a much lower rate than income tax—as low as 15 per cent. This means you save 20 to 47 cents for every dollar you invest in superannuation, so your money can grow faster and attract less tax than might otherwise be possible.
Superannuation Guarantee (SG) contributions
Providing you meet minimum age, salary and work hours requirements, employers must currently contribute 7 per cent of your salary to an approved superannuation fund. By July 2002 this figure will rise to 9 per cent. Ask your employer if SG contributions will be made in addition to your salary or will be deducted pre-tax from your salary.
Which super fund?
Your employer may pay the SG contribution into
- an employer fund, sponsored by your employer,
- an industry fund, with members in your industry
a public superannuation fund which accepts contributions from both individuals and employers
Many employees can already choose the fund into which contributions are made on their behalf, and the Federal Government is considering extending this choice to other super fund members.
What is 'salary sacrificing'?
Salary sacrificing is when you arrange with your employer to have some of your salary paid directly—pre-tax—into your superannuation fund. By doing this you reduce the amount of income tax you pay, and because super funds are generally taxed at a lower rate than your salary, you have a higher after-tax amount to invest.
Salary sacrifice is a good option to consider if you are paid bonuses at work, but the details must be worked out before you receive the income.
Beware! Salary sacrificing may reduce other benefits such as leave loading and holiday pay, which are often calculated on your base salary.
What is the super surcharge?
The Superannuation Contributions Tax Surcharge is an additional tax of up to 15% on 'surchargeable' superannuation contributions where the member's 'adjusted taxable income' exceeds $75,856 (1998/99). From 1999, the income assessed includes the taxpayer's 'reportable fringe benefits'.
Contributing to a spouse or partner's super fund
Since 1998 the Federal Government has allowed workers to contribute as much as they like to a spouse or partner's (including de facto) super fund (as long as the partner is under 70 years of age). Up to age 65, there is no longer a requirement that your spouse work or indeed has ever worked!
The chief benefit is increasing the amount of tax advantaged super you can accumulate as a couple, and subsequently reducing the tax you pay on any retirement income stream. This strategy makes sense if one partner's superannuation nest egg is significantly larger than the other's or if one partner is not working or is on a low income.
You receive an 18 per cent tax rebate each year on contributions of up to $3,000 if your spouse earns less than $10,800 per annum, reducing on income up to $13,800. That's up to $450.
Should I contribute extra to super?
Provided you are within your Reasonable Benefit Limit, at this stage of your life you should be planning to maximise your superannuation retirement benefit through a retirement savings strategy. This may mean boosting the personal contributions you make into your superannuation fund or into a fund for your spouse in the years to retirement.
Additional contributions need not be made into the fund currently used by your employer. A financial planner can advise you on your various options for making these "top up" contributions. It is not unusual to be a member of more than one fund, but the fees charged by each fund may make multiple membership more costly. The costs and benefits need to be carefully weighed up for your particular circumstances.
Your credit union will be able to make an appointment with a financial planner who can help you work out how much more you should save in your super fund
How does your super grow?
Whatever fund you're in, you may have to decide how you would like your superannuation savings invested. Some funds give you a narrow investment choice, if any, while others offer a wide range of investments.
As you still have a number of years before retirement and a long-term investment perspective, you may wish to consider an investment mix which includes some growth investments such as shares and property. Based on historical performance, these types of investment should give you a higher return if your funds remain invested for seven years or more.
However, your investment choice will also depend on how tolerant you are to investment volatility and risk, in other words, whether you are comfortable with an investment which may rise and fall significantly in value, even though over the longer term its earnings may be superior.
What happens when I change jobs?
If you change jobs, you may have to take your preserved super contributions and earnings out of your employer fund and transfer it to a "rollover" fund or into another super fund. This amount is known as your superannuation ETP (Eligible Termination Payment).
Eventually, consolidating your superannuation into one rollover fund can save you time and money, but choose where to park your money carefully.
When can I take out my super?
Most superannuation benefits cannot be touched until you have retired and have reached your "preservation age". This is the age at which you can withdraw preserved benefits from your superannuation fund.
If you were born before July 1960, you can take your retirement benefit at age 55. Otherwise you will have to wait longer, up to age 60 for those born after June 1964.
Any voluntary contributions you have already made to your super fund are called 'non-preserved' contributions and can usually be withdrawn tax-free when you leave your job (although tax may be payable on any investment returns achieved).
From July 1, 1999 almost all additional contributions you make, including voluntary contributions, will be preserved until your preservation age.
Financial hardship
In certain circumstances the Government may allow you to access part of all of your preserved benefits. If you have been retrenched and unemployed for an extended period, or have been receiving social security benefits for nine to twelve months-depending on your age-your super may be released.
Non-preserved benefits
Voluntary after-tax contributions you made to your superannuation funds before July 1, 1999 may be withdrawn tax free when you leave your employer (earnings on your investment may be taxed). Any contributions made after July 1 must be preserved until you retire.
Eligible Termination Payments (ETP)
There are two sorts of ETP. The employer ETP may include part of any redundancy payment, ' golden handshake' payout or unused leave entitlement. You will also receive an ETP from your superannuation fund which includes the compulsory contributions your employer has made under the Superannuation Guarantee charge, some of your own contributions and any investment earnings.
Most superannuation ETPs will include some preserved benefits which you cannot access until you retire and must therefore be 'rolled over' into another super fund or rollover fund. There may also be an ETP component which you may choose to withdraw in cash after paying tax.
What is an RBL?
Your Reasonable Benefit Limit is the highest superannuation benefit you can take (from specified sources) while paying the concessional tax rate.
RBLs were salary dependent until 1994, but are now indexed, flat dollar amounts. Transitional arrangements apply for those disadvantaged by this change.
Every person has two RBLs—a Lump Sum RBL ($485,692 in 1999/2000) and a Pension RBL ($971,382). The Pension RBL allows you to have a higher superannuation benefit before having to pay a higher tax rate, but to qualify you must purchase a complying pension or annuity. If you accumulate more than your RBL, the excess will be taxed at the top marginal tax rate (currently 48.5%) when withdrawn.
How much do I need to retire?
Working out how much money you will need to retire comfortably is a complicated process, particularly as superannuation and taxation laws are constantly changing. Each of us will have different needs and wants during retirement, so to make sure you're covering all your bases it's important to discuss your retirement with a professional financial planner. The sooner the better!
An important first step is to decide what type of lifestyle you and your partner want-or will be able to afford-when you retire. Consider issues of where you plan to live, how much money you will need to cover day-to-day expenses plus ongoing expenses such as your mortgage and loans, and how often you plan to take holidays.
Then estimate how much you think this lifestyle will cost. As a rule of thumb, many middle-income earners find they need about $25,000 a year to survive comfortably in retirement, which means you'll need a nest egg of around $425,000 if you want to retire when you're 55. If you're aiming to retire at 55 on $40,000 a year you'll need $680,000.
You may get a shock when you see the figures but don't despair. Your financial planner can help you uncover ways to unlock money tied up in assets or investments that can be turned into income streams for your retirement.
Is superannuation safe?
The government does not guarantee the safety of superannuation, so it is your responsibility to find out how your super fund manager operates and invests your money.
However, if the fund invests in a capital guaranteed facility with a life insurance company the life office does guarantee the return of your capital and may even guarantee earnings.
Retirement Savings Accounts (RSAs)
RSAs are low cost, low risk products offered by credit unions and other financial institutions as alternatives to the usual superannuation funds. Fees are generally low and the accounts benefit from member protection rules applying to accounts less than $1,000.
RSAs all carry a "capital guarantee" which means that you cannot lose the money you originally contributed. However, they are invested in low risk products and so their investment earnings are likely to be relatively modest.
What happens to my super when I die?
In the event of your death, your superannuation benefit will usually be paid at the discretion of your super fund trustee. If you nominated a beneficiary when you joined the fund the trustee will normally take this into account when deciding who receives the money. If, however, your nominated beneficiary does not receive the benefit, there are appeal mechanisms available.
Is my spouse entitled to any of my super if we divorce?
The rules vary from State to State, but generally, courts consider superannuation benefits as family assets and will divide them accordingly if you divorce.
Locating 'lost' superannuation
If you've moved house or changed jobs in the last 10 years and no longer receive regular statements from your superannuation fund, you may have lost track of your super. You are not alone.
The Australian Taxation Office's register of 'lost superannuation' contains 2.1 million accounts valued at $1.7 billion. If your super fund manager cannot locate you, your name is entered on the Lost Members Register and your money stays with that fund until you reach the retirement age of 65. This money remains your property (or your estate's), so it's worth tracking down.
To find out which super funds are holding your money contact The Lost Members Register helpline 13 10 20.
Looking towards retirement
Looking a little ahead, there are various ways you may be able to take your superannuation to enjoy the fruits of your labour in retirement:
- Some Government and employer funds offer a pension, indexed to the Consumer Price Index or other measure of inflation, which should provide a modest, secure income for life. These pensions often have an option to take a lump sum instead.
- You can take your superannuation benefit as a lump sum, pay some tax and invest the rest in a tax-effective allocated pension or allocated annuity.
- You can use your superannuation benefit to purchase an immediate lifetime annuity, indexed annually with a "reversionary" benefit for your spouse.
You can combine the above
You need to be careful that your benefit, and that of your spouse, does not exceed your respective Reasonable Benefit Limits (RBLs). Many in this age group will have a so-called "flat RBL" which is around $490,000 each if taken as a lump sum or converted to an allocated pension, double that amount if taken as a pension or converted to an annuity. If you are in your 50s you may have qualified for a higher "transitional RBL".
Either way, seek professional financial planning advice to find out if you would be better off with your benefit. You should also consult a planner before accepting any offer to change your superannuation fund.
Government/Employer Pension
If you are likely to receive such a pension, it is typically provided as a lifetime, indexed pension which can be commuted immediately or later into a lump sum. Some Government superannuation benefits can be very complex and offer you different benefit options, so you would be well advised to speak to a financial planner before committing yourself.
Allocated pension/annuity
An allocated pension or allocated annuity can be created by rolling over a superannuation payment at retirement. These products are available through a range of fund managers. However, if a master trust structure is used, it's not necessary to sell the underlying assets-only the structure changes. This can save considerable tax.
The owner of the pension or annuity must select an annual income between minimum and maximum levels specified by legislation for the pension balance and the owner's age. It is also possible to commute a portion of the balance by paying tax, providing access to capital that is not possible with a lifetime annuity.
On the death of the owner, the balance of the allocated pension/annuity passes to the owner's beneficiaries.
An allocated pension/annuity appeals to those who wish to retain control over their investments and have the flexibility to access their capital if needed.
With an allocated pension/annuity, you run the risk that your income will be severely reduced or even run out before you die, but judicious selection of income levels combined with access to Age Pension benefits should minimise this risk.
Immediate Lifetime Annuity
A lifetime annuity may be purchased with a superannuation benefit. Unlike some employer pensions that may have a commutation option, once an annuity is purchased no capital entitlement remains. There is therefore a risk that the annuity owner could die relatively soon after purchase. For this reason it is possible to include, at a higher price, a minimum period over which the annuity will be paid as well as a reversionary pension to the spouse.
Annuities, like pensions, suit people who are most attracted to the security and regularity of payments and who do not wish to be faced with investment decisions nor decisions on how much they can afford to take each year.
In summary
In your 40s and 50s, your focus should be on putting into super as much as you can afford (in both names if a couple) up to the maximum level encouraged by tax.
Arrange an obligation-free appointment with a credit union financial planner to discuss how you can build up your super before retirement.
