Superannuation: how does it work in Australia

Superannuation is money that you save during your working life to use as income when you retire.

Like any other investment, the intent is to increase your super account balance, over the long term, while you’re still working. Once you’ve reached retirement, your super savings are generally converted into a pension, providing a regular income for you to live on.

Understanding how superannuation works in Australia, will help you ensure your money’s being managed the way you want it to.

How superannuation works in Australia

If you work in Australia in any capacity, you must be paid super by your employer. This is paid on top of your annual salary known as the Super Guarantee (SG). This includes many people who may consider themselves self-employed but are employed by their own company or trust.

Currently, your employer must contribute 10% of your salary into super. This rate will continue to increase every year until it reaches 12% in 2025.

The intention behind the gradual increase is to see a greater proportion of retirees relying less on the age pension and more on their retirement savings.

Your Future, Your Super

The Federal Government has also introduced a new set of reforms which will see your super follow you from job to job. This means when you start a new job, your employer will be required to pay super into your existing ‘stapled’ fund, if you don’t nominate a new one.

There is also a new YourSuper comparison tool that assists you in choosing a super product to best suits your needs.

How your super is invested

Many of the principles of investing in super are the same as investing outside of super. The main difference is how your investments are taxed: you pay less tax on investment earnings inside super.

If you are a member of an industry, retail, corporate or public sector fund, your money is combined with other peoples’ super to buy investments. This enables your super to grow in two ways:

• growth in resale value called capital growth
• reinvested income such as rent or dividends.

If you don’t actively choose how you want your money invested when you join a fund, you will be placed in a default investment option. These are designed to cater for a large group of people, based on specific investment criteria that the fund must deliver to. Normally, these options have around 60-80% of their funds invested in growth assets such as shares and property.

It’s important to regularly assess how your super’s invested and make changes if necessary. For example, taking a more conservative approach, means you’ll have higher exposure to cash and fixed-income assets as they offer less risk than shares and property.

What are the main types of super funds?

Superannuation funds can be broken down into five different types:

Corporate/employer-sponsored super funds

Some medium to large businesses have their own super fund which is only available to their employees. They can offer tailored fee and insurance arrangements, and a wide range of investment options.

Industry funds

Industry funds were originally established to support employees within a particular sector but most are now open to everyone. They stand by a non-profit, member-first ownership model and re-distribute profits from investments directly to members.

Retail funds

These funds are run by banks, financial institutions or investment companies, designed to give members a vast array of investment options. The company that owns the fund generally aims to keep some profit which is paid to shareholders.

Public sector

Designed for people working in the public sector, these funds have limited investment options but low fees. Profits remain within the fund for the benefit of members.

Self-Managed Super Funds (SMSFs)

SMSFs enable you to have complete control over how your retirement savings are invested—a private super fund that you manage yourself.

Personal super contributions

The 10% of your salary that your employer contributes into super may not be enough to sustain the lifestyle you currently have, or the one you wish to have, during your retirement.

There are a range of strategies you can implement to improve your retirement savings, like putting a little extra money into your super while you’re still working.

Personal super contributions—those made from money you’ve already paid tax on such as savings or your take-home pay—are tax deductible. These contributions can be claimed against your assessable income when you lodge your tax return.

The rules on personal tax-deductible super contributions

There are rules surrounding tax in super that you should be aware of.

• Personal contributions are concessional contributions so, they’re capped at $27,500 per financial year¹. If you choose to contribute over this amount, you may be required to pay more tax.
• Your personal super contributions are taxed at 15%² which is significantly lower than what most people pay on their taxable income (the highest marginal tax rate is 47% if you include the Medicare Levy).
• Higher income earners (on more than $250,000) are taxed at 30%³ on contributions. That’s a decent extra tax hit—but still a lot less than the top marginal tax rate.
• If you’re a lower income earner on a marginal tax rate of 15% or close to it, there may be little advantage in making a tax-deductible super contribution. Speaking to a financial adviser can help you decide the best approach.
• If you’re 67 or over you need to meet a work test before you can make a personal super contribution. This means you must have been employed during the financial year for at least 40 hours over a period of no more than 30 consecutive days.

Tax on super investment earnings

Your super fund pays tax on your behalf for any income or profits your make from your investments. The tax is reflected in the daily unit price for each investment option.

• Super account investment earnings are taxed at a rate of up to 15%
• Retirement pension account investment earnings are not taxed.

Bottom line: Super is harder than it probably should be—but better than you think. The mix of a whole range of tax savings, structured long-term investing and regular contributions make it a powerful engine for delivering an anxiety-free retirement.

Source: If you have questions and would like your financial situation to be evaluated, please email us on ds@bluerocke.com with your contacts, for an exploratory meeting, at our cost, not yours.

If you have questions and would like your financial situation to be evaluated, please email us on ds@bluerocke.com with your contacts, for an exploratory meeting, at our cost, not yours.

By Andrea Sophocleous

When it comes to super, the accepted wisdom is that performance is the most important consideration. That means we often ignore another critical part of our superannuation.

Most super funds include life insurance along with total and permanent disability (TPD) insurance for their members. In fact, more than 70 per cent of Australians who have life insurance do so through their superannuation. Some funds also offer income protection.

So, is it the right option for you?

Suzie Brown, general manager of MLC Wealth at MLC Life Insurance, lists lower premiums, convenience and fewer health checks as the key advantages of insurance through super.

“Because super funds buy insurance for groups of people, they’re paying a wholesale price so often the premiums cheaper. Payments are automatically deducted out of your super, meaning you don’t have to pay out of your own pocket,” explains Brown.

“And as you get cover automatically, you don’t have to do medical or health checks.”

Jeff Thurecht, personal financial adviser at Evalesco Financial Services, says insurance through super is a good choice for anyone working in a high-risk industry.

“There are high-risk occupations that are hard to get cover for [such as construction, mining, demolition, policing and firefighting, or even window cleaning if performed at great heights], so it makes sense to take advantage of group cover,” he says.

One thing to factor in, however, is that insurance through super can reduce your retirement savings because the premiums are deducted from your super balance, explains Thurecht.

“The great thing about compound interest is having that money growing year on year for 40 years, but any dollar taken out is losing that compound benefit. That doesn’t mean it’s not a worthwhile investment; you just have to make a conscious choice,” he says.

While the insurance you receive in super is a good safety net, you need to be aware if it’s sufficient for your specific circumstances.

“Typically, the default levels of cover in insurance through super are set fairly low because they’re meant to be relevant for everybody,” Thurecht says.

“A good time to review your insurance is as soon as your financial circumstances change – whether it’s taking out a mortgage, having children or increased earnings in your job. You can then look at whether increasing it within your super is a good way to go.”

According to Brown, the sort of questions you should be asking are: What am I paying? Do you have me listed as a smoker? Is my high-risk occupation covered?

“Being classified as a smoker or any other incorrect information could be costing you a loading on your premium,” she adds.

Making a personal choice

39-year-old carpenter Brian Hayes, whose work is primarily on building sites, pays for liability insurance that covers him for any damage done to property or in the event of injury for which he’s at fault.

But he admits he’s not across the cover he receives as part of the insurance through his super. “It’s reassuring to know that I have the extra insurance, but I haven’t checked how much I’m paying in premiums or whether that’s the best option for me,” he says.

“Ideally, I’d like to have the largest possible super balance once I retire, but I’ll be exploring all my options before I make a decision on whether to stick with insurance through super or change to personal insurance.”

Thurecht says that for someone like Hayes, who is assessing whether to pay for insurance through their super balance or through personal savings, it’s important to remember that it’s all your money.

“Consider aspects such as the cost of policies inside or outside of super and whether there are any tax benefits (such as the tax deductibility of income protection) that may come your way,” he says.

And for those who might be looking to switch to a new super fund, first check whether you’re able to transfer the insurance and will continue to be covered.

According to Brown, approaching a new super fund through the lens of insurance will stand you in good stead. “When you’re consolidating or moving super funds, insurance needs to be a consideration,” she says.

“You need to be comfortable that the new fund provides cover for your occupation and your age. If you have pe-existing medical conditions, you may not be able to get the cover you want.”

Overall, if you’re unsure, you can start by talking to your super fund or a financial adviser for a tailored solution.

If you have questions and would like your financial situation to be evaluated, please email us on ds@bluerocke.com with your contacts, for an exploratory meeting, at our cost, not yours.

Article source MLC https://www.mlc.com.au/personal/blog/2021/11/the-superannuation-puzzle-piece

Key takeaways

• There are a whole range of strategies that make it worthwhile putting a little extra effort (and money) into your super
• Personal super contributions—those made from money you’ve already paid tax on such as savings or your take-home pay—are tax deductible
• Your personal super contribution is taxed at 15% which is significantly lower than what most people pay on their taxable income.

Ever woken up on your birthday and found a horribly-wrapped present at the end of your bed? Plain paper, bulky sticky tape, badly written card? But then you open the present and it’s what you’ve been dreaming of for years?

The same could be said for super. It’s messy, complicated, tricky to get into. But worth it in the end.

Why? Because the three layers of tax benefits—when you contribute, while your money’s invested and when you take it out—could make it supremely effective at giving you a long, worry-free retirement.

Tax-deductible super contributions

One particular tax benefit is tax-deductible contributions to super.

Personal super contributions—those made from money you’ve already paid tax on such as savings or your take-home pay—are tax deductible. These contributions can be claimed against your assessable income when you lodge your tax return.

Bottom line? You get to save some tax whilst bringing you closer to your retirement goals.

The rules on personal tax-deductible super contributions

There are rules surrounding tax in super that you should be aware of.

• Personal contributions are concessional contributions so, they’re capped at $25,000 per financial year¹. If you choose to contribute over this amount, you may be required to pay more tax.
• Your personal super contribution is taxed at 15%² which is significantly lower than what most people pay on their taxable income (the highest marginal tax rate is 47% if you include the Medicare Levy).
• Higher income earners (on more than $250,000) are taxed at 30%³ on contributions. That’s a decent extra tax hit—but still a lot less than the top marginal tax rate.
• If you’re a lower income earner on a marginal tax rate of 15% or close to it, there may be little advantage in making a tax-deductible super contribution. Speaking to a financial adviser can help you decide the best approach.
• If you’re 67 or over you need to meet a work test before you can make a personal super contribution. This means you must have been employed during the financial year for at least 40 hours over a period of no more than 30 consecutive days.

Claiming your tax deduction

To claim a tax deduction, you’ll need to provide your super fund with a ‘Notice of intent to claim or vary a deduction for personal super contributions’ form. This form is available through your super fund or the Australia Taxation Office.

Once your super fund receives your form, they’ll be able to confirm the amount you’re eligible to claim as a tax deduction.

Bottom line: Super is harder than it probably should be—but better than you probably think. The mix of a whole range of tax savings, structured long-term investing and regular contributions make it a powerful engine for delivering an anxiety-free retirement.

There are a whole range of strategies—like personal tax-deductible super contributions—that make it worthwhile putting a little extra effort (and money) into your super. Talking to a financial adviser can make it a lot easier.

If you have questions and would like your financial situation to be evaluated, please email us on ds@bluerocke.com with your contacts, for an exploratory meeting, at our cost, not yours.

Article Source: https://www.mlc.com.au/personal/blog/2020/08/are_super_contributions_tax_deductible

Key takeaways

• Compulsory super contributions are legislated to increase from 9.5% to 10% as of 1 July 2021
• Caps for your own super contributions will also increase, enabling you to add more to super
• The maximum amount of super that you can transfer into a retirement pension account will increase by $100k.

There are changes affecting super from 1 July 2021 which could impact you.

In this article we outline what those changes are so you can be better prepared.

Compulsory super contributions increasing

Your compulsory super contributions—paid by your employer—are legislated to increase from 9.5% to 10% as of 1 July 2021.

But it won’t stop here.

The rate will continue to increase incrementally by 0.5 percent every year until it reaches 12 percent by 2025.

The intention behind this measure is to see a greater proportion of retirees relying less on the age pension and more on their retirement savings.

Changes to your own super contributions

Currently there is a limit to the amount of super contributions you can make yourself, whether you make these using your take home pay or through your employer.

As of 1 July 2021, this limit is changing so you may be able to add more to your super.

Before tax contributions

The current cap or limit you can contribute to super using your income—before it’s been taxed—is $25,000 a year.

From 1 July 2021, this limit will change to $27,500 a year. You can also add any unused cap amounts that you may have accrued since 1 July 2018 if you’re eligible.

Your own contributions

If you currently make contributions with your own money into super—that is using income after it’s been taxed or from your savings—the current limit you can contribute is $100,000 a year.

From 1 July 2021, this will change to $110,000 a year. If you’re eligible you can also contribute up to three years’ worth of your own contributions ($330,000) under the bring-forward rules.¹

¹Assumes the person is under the age of 65 at some time during the year when a contribution was made and that the total super balance was less than $1.48m at 30 June 2021.

Many women reach mid-life with a significant superannuation shortfall. But it’s not too late to turn things around. Actions now may help set up a more secure retirement.

When was the last time you checked your super balance? The hard fact is that Australian women accumulate, on average, far less super than men over their working lives and retire with smaller balances.

Men aged 55 to 64 had an average balance of $270,710 in 2017-18, while women of the same age averaged $157,050, according to statistics published by the Association of Superannuation Funds of Australia (ASFA) in 2019.¹ That’s a difference of 58 per cent and shows that women are far less financially prepared as they approach retirement.

Shockingly, one in three women across all age groups have no super at all. Reasons for this include self-employment, working casually or part-time in jobs where the hours worked aren’t enough to qualify for employer contributions, or having never been in paid employment.

Super-sized setbacks

Beyond having no super at all, there are several reasons why women find themselves well behind men in the balance stakes by the time they reach their forties and fifties. Typically, they’ve taken time out of the workforce to have children, and then chosen to only return part-time while raising them. Women are also more likely than men to become unpaid carers for ageing parents and relatives. During these busy ‘sandwich generation’ years, personal financial planning can take a back seat to more immediate family needs.

And then there’s the gender pay gap – the difference between male and female average earnings. It currently sits at 14 per cent in Australia, according to the Workplace Gender Equality Agency.²

Because of these factors, many women head towards retirement without enough savings to support even a modest lifestyle – particularly if, for whatever reason, their spouse or partner’s super is taken out of the equation.

Making ends meet in your later years

Life doesn’t always go according to plan. Unexpected events like illness, job loss and relationship breakdown may cause significant financial challenges down the track if you don’t take steps now to secure your future. On top of working towards an adequate super balance, this is where having a plan B to provide support – for example, ensuring you are appropriately insured – is important. As is being actively involved in the financial planning decisions in any relationship.

For many Australian women, it is a lesson that comes too late. The number of homeless women aged over 55 has spiked in recent years – up 30 per cent between 2011 and 2016, according to the Australian Human Rights Commission.³ Risk factors for homelessness in later life, according to the Commission, include experiencing economic disadvantage or family or domestic violence, lack of family support, mental health issues, relationship breakdown and the death of a partner.

Many women in these situations have little or no super or savings and live precariously, struggling to cover bills and basic expenses via Centrelink payments and, once eligible, the Age Pension.

Simple steps you can take today

It’s a sobering prospect – but it doesn’t have to be that way. If you’re in the workforce, either full-time, part-time or casually, you can turn things around. Boosting your super savings in the second half of your working life can make a big difference to your final balance and the lifestyle you’ll be able to enjoy when you stop working.

Reviewing your outgoings and assets – including how much is in your super account – will help you understand your position and create a plan to get back on track, says MLC General Manager, Workplace Super, Helen Murdoch.

“Facing into this is so important,” she adds.

“If you’re 50 now, you have another 17 years before you may potentially be eligible for the Age Pension. But it’s not too late to make a big difference during that time. There’s so much you can do.”

Here’s a few things to get started:

1. Check your investment options. There are a few considerations when deciding if a growth-oriented profile or more conservative profile, is right for you. Take this opportunity to check that your current profile aligns with your long-term goals and you’re still on track. Learn more
2. Many people have insurance through their super, but is that right for you? If it is, how much cover do you need? Insurance can be very valuable – but make sure your super savings aren’t reduced by the cost of insurance you may not need. Read more
3. A good way to keep your super in shape is to get closer to your super. Get secure access to your accounts by downloading the MLC app. Get the app

Sorting out a super shortfall

It’s not uncommon for women in their forties and fifties to enjoy a second wind in their careers, as their children achieve independence and start to make fewer demands on their time and the family budget.

If this is you, you may find it’s an ideal time to start making additional voluntary contributions to your super. You can do this in a number of ways. For example, you can ask your employer to make a regular deduction from your salary, or you could make personal contributions from your take-home pay.

Topping up your balance won’t just build your retirement nest egg, either; it could help you to manage tax.

Contributions you make with pre-tax dollars, such as salary sacrifice contributions, are taxed at a maximum of 15 per cent for most people up to the contribution caps.⁴ (High income earners may have to pay an additional 15 per cent tax on these contributions). You may also be able to claim a tax deduction for personal contributions you make to super. Depending on your income level, this can be a smart way to help manage your tax and maximise the amount you’re saving for retirement.

Looking ahead to a more secure tomorrow

Catching up on your super can seem daunting, but it doesn’t have to be. There’s still time to tackle the issue, and doing so will help provide you with a more comfortable retirement when the time is right for you. And, if you haven’t contributed up to the limit in a previous year, you may be able to make larger contributions now or in the future to give your retirement savings an extra boost.

“It’s okay to feel worried and intimidated, but you can’t let that stop you from stepping up to secure a better future,” Murdoch says.

“Often, women are so used to looking after everybody else, they neglect themselves. But now it’s time to look after yourself and plan for a great future for you.”

We are here to help. Contact Dev Sarker at ds@bluerocke.com today!

Source – https://www.mlc.com.au/personal/blog/2020/10/the_crucial_super_moves

¹ Better Retirement Outcomes: a snapshot of account balances in Australia, Ross Clare, June 2019, https://www.superannuation.asn.au/
² https://www.wgea.gov.au/data/fact-sheets/australias-gender-pay-gap-statistics
³ https://www.humanrights.gov.au/our-work/age-discrimination/publications/older-womens-risk-homelessness-background-paper-2019
⁴ https://www.ato.gov.au/individuals/super/growing-your-super/adding-to-your-super/salary-sacrificing-super/