What Is Superannuation?
Superannuation is the back bone of our retirement system, alongside the aged pension and home ownership.
What Is Superannuation?
Superannuation is the name for accounts for all Australian’s to save for their retirement. So super = retirement savings.
One of the main benefits of contributing to superannuation is that it's contributions and investment earnings are only taxed at only 15% during your working life and investment earnings are taxed at 0% during retirement.
However, there are a few catches to this.
Most people increase concessional contributions (before tax) to decrease the amount of income tax payable while saving for retirement. However, you can only concessionally contribute up to $25,000 including what your employer pays.
This is unless you utilise the 'carry forward rule' where you can utilise unused concessional contribution amounts from up to five previous financial years, providing your total superannuation balance just before the start of that financial year was less than $500,000.
Money in superannuation generally cannot be accessed until retirement or a condition of release (such severe financial hardship) is met.You can only contribute to superannuation after the age of 65 if you meet a work test.
There is a limit to superannuation that can be transferred into the retirement phase. The transfer balance cap is currently $1.6 million.
Sounds pretty simple right? Not so fast.
There are two main styles of super accounts, accumulation accounts and defined benefit accounts.
1. Accumulation accounts are by far the most popular type of super savings in Australia. The way they work is pretty simple. Over your working life, your employer will contribute at least 9.5% of your salary into your retirement account. This money gets invested and when you retire, the total of your invested balance is your retirement money.
2. Defined benefit accounts are much more complex. Employers pool retirement savings and then upon retirement an individual is entitled to a lump sum or annual payment that will vary on factors such as; final salary, length of employment etc.
These are not regularly offered today, but they are still present with many older and sometimes government workers.
One of the most popular questions I get asked every week is “Which super fund is best?''
The truth is, there is no “one best fund." Much like how a sports car isn’t a great fit for a family of 5, not all superannuation funds suit everyone.
There are 3 main types of superannuation funds in Australia.
3. Self Managed Superannuation Funds (SMSF’s)
Industry funds are famous for their ads on TV. You know the ones I am talking about. Industry funds include “MTAA Super” (Motor Trades Association of Australia Super) and “REST” (Retail Employee’s Superannuation Trust).
Generally, these funds have low administration costs but typically will not offer a wide array of investment options and offer predominately in house products.
Retail funds tend to be a little different. The biggest players in this space include Colonial First State, BT and AMP with new competitors such as Netwealth and HUB24 quickly gaining popularity amongst investors.
Typically, administration fee’s will be a little bit higher in these funds however they have greater investment options. For example, HUB24 allows for over 500 investment managers plus any listed Australian Share. It's common for these funds to provide members with greater transparency in terms of reporting such as fees, wholesale investments and performance indicators.
These features can enable members to gain greater control to monitor retirement savings in most cases. These funds can be particularly useful for individuals who are passionate about certain investments (such as ethical investments or wanting increased exposure to a particular sector of the market).
Lastly, there are Self-Managed Superannuation Funds (SMSF’s).
Before, I talk about the benefits of an SMSF, I want to make the following very clear: SMSF’s are not for everyone and before opening one, seek professional financial advice to ensure that it is right for you and that you understand the responsibilities that come along with being the Trustee of an SMSF.
That warning aside, SMSF’s can be a great way to build wealth for retirement, having the greatest number of investment options available to members. Typically, one of the most popular reasons to set up an SMSF is to invest in residential property.
However, property aside, investment options can include; cash, shares, managed funds, term deposits, loans, fixed interest, collectables (yes that includes wine and baseball cards), artwork and precious metals.
At the end of the day, the best super fund for you is one that will enable you to achieve your goals and enable you to invest in a way that is appropriate for you.
The process of saving and investing money for your future can be complex and overwhelming and this is where meeting with a professional adviser can benefit you.
The great thing about a financial adviser is that the first meeting is usually free of charge and you can learn more about how their services and how they can help you reach your goals, locate and choose a Superfund and gain greater financial literacy along the way. #superannuation #financialadviser