Previously in the managing money financial education series, we talked about building financial literacy, building your budget, insurance and now we are on to superannuation. While many people avoid even taking the slightest action with Superannuation, only a small amount of work can have a great impact increasing your long-term wealth and an added benefit is that most superannuation is for the most part set and forget.
How super helps your future
Superannuation helps you to save for your retirement in Australia. 14.8 million Australians had super funds at July this last year. 43% of these had one account. Every employee has a superfund or funds where employers pay 9.5% of salary. Ideally, this money should be subsidised by the employee with further contributions. This money is invested and as such, grows over time. The Federal government can add to super through contributions and low-income super contributions.
What are the changes?
Changes to Superannuation on 1 July 2017
A variety of changes to the superannuation system come into effect commencing July 1, 2017, with some changes impacting through to 2020.
If anything on the list below applies to you then it may be worth checking the ATO super change site website to look at changes the may direct apply to you.
- If you or your spouse earn less than $40,000?
- Are you making extra contributions to your super?
- Are you approaching retirement or are you retired?
- Have you taken time out of the workforce or do you work part time?
What is superannuation?
How to choose a super fund
Super is the single most important savings regime you will undertake in your life. Either you or your employer can choose your super fund. In the end, you should be taking charge of your super yourself. It’s what you will live on in the future. These are some differences to compare when choosing a fund:
- Fees – the lower, the better
- Investment options – ensure these suit your needs and you are comfortable with the risk
- Performance – choose a fund that has performed well over the last 5 years. Consistency is key
- Insurance – see what deals are available to you
- Service – call or look at a website to find out whatever services are available to you
- Calculators are useful in guiding your decision
Your super statement
You will get an annual super statement from your fund, much like a monthly bank statement. It is a great idea to check and review the following things on your statement:
- Your personal details are correct
- Check and see if the balances look correct (9.5% of salary)
- Employer’s payments – make sure you are receiving contributions either quarterly or more frequently
- Personal payments – make sure these are going to the right place whether they are paid directly or from a payroll deduction
- Fees – are they reasonable and have been outlined
- Insurance – not a fee but a premium for personal insurance cover. Make sure you have the cover you are paying for
- Tax – employer and your own personal contributions are taxed at 15%. If you are paying a higher rate, you may not have provided your fund with your Tax File Number
- Investment – make sure your options are still right for you
As you change jobs or careers, you will be given the option of other super funds. Consolidating your super into one fund is one way to reduce fees and keep your money working for you. You might find a fund with better services and features to match your industry. If a fund has performed badly over the last 5 years, you should consider leaving it. Also, you may want to leave a corporate fund if you leave a particular employer.
Changing funds is not something you should rush into. Make sure you judge on performance. Last year’s best performer may not be consistent into the near future. Changing funds can come with exit/termination fees from your old fund and contribution fees to your new one. You also should check if changing funds will affect how much your employer contributes and the impact this will have on your retirement. Furthermore, make sure you aren’t losing out on your insurance benefits.
Accessing your super
You can access your super when you turn 65, regardless of whether you have retired or not. If you have already stated a transition into a retirement income stream, you may be able to access your super as well. Check your preservation age. This depends on when you were born.
How much tax is paid on super contributions and super benefits depends on a range of factors. The type of contributions that you make and how much your contribute affects the tax paid. Tax on your super benefits depends on age, the source of benefit and how the benefit is paid. Finally, the Tax treatment of both super and death benefits is directly affected by whether the payments are a lump sum or regular income stream.
Recovering lost super
Many Australians lose money in unrecovered superannuation. In fact, there are over 5.7 million lost and ATO-held accounts, totalling over $14 billion in lost funds. This happens when an employee changes super funds without rolling over their original super. It may also occur if you have changed your name, address or have lived out of the country for some time.
Check if you have any lost super to your name and tax file number by registering for the Australian Tax Office’s online services through MyGov. This will allow you to see details of all the super accounts aligned to you. You can also find ATO-held super if you employer cannot find an account to deposit the funds to. You can also elect to have your super deposited into a single fund for easy management. Super accounts may take up to 6 months to appear in MyGov from opening.
You can qualify for the Age Pension at 65, the same age that you can access your super. Age Pension is a safety net for those who have not accrued enough super or other financial resources to guarantee a comfortable retirement.
Applicants are means-tested on a case-by-case basis. Your income and assets determine your eligibility for a benefit. It also determines the level of Age Pension benefit you receive. The Asset Test reduces the amount of benefit you receive by $1.50 for every $1000 of assets you possess. If you earn income from any job or investment, your Pension is reduced by 50 cents on the dollar for a single pensioner or 25 cents for a couple. This is the Income Test. These results are compared and the smaller overall pension is the one you receive from the government.
The rate of Age Pensions is different for couples and singles and is adjusted periodically to take into account inflation and changes in standard of living within the community. Benefits and concession rates are available to pensioners from the Commonwealth, State and local governments.
Lump sum or pension?
Taking a lump sum or regular payments of your super largely depends on your individual situation. Either can affect the amount of tax you pay and your entitlement for the government-funded Age Pension. Centrelink can provide information on how taking a lump sum or pension will affect your tax payments. Tax rules usually favour taking benefits as a pension rather than a lump sum for posterity.
Super is a lifetime investment with many benefits. The longer you save, the bigger your retirement fund is. Did you know that some super funds offer death, disability and income protection insurance at a cheaper price? Super has many benefits check it out today.
As always any ideas in these blogs are general in nature and you should always consult a financial advisor should you wish to make any changes decisions.
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