For many people, super is one of the best ways to grow your wealth, as it provides significant tax concessions to help you save for retirement.
What is super?
Superannuation is a specialised type of investment designed to help you accumulate a significant level of savings for your retirement.
To encourage you to save for retirement, the government provides special tax advantages for super investments. For most people, these tax advantages make saving through super more tax‑effective than saving outside it, which means their savings can grow faster.
In return for the tax advantages, the government restricts when and how you can access your super – generally you need to wait until you retire after reaching what is known as your ‘preservation age’.
Why is super important?
Australians now have a higher life expectancy than ever before. Current figures show that on reaching the age of 60, the average man will live for another 23 years and the average woman another 26 years. (1)
It is unlikely that the government Age Pension alone will give you the financial freedom you want for the 20 or more years you are likely to spend in retirement. The Age Pension is designed to provide a basic income, but most people want a lot more from their retirement years including overseas travel, dining out, spending more time with their families and enjoying a more relaxed lifestyle.
Growing your super
There are several different types of super contributions; however these can be divided into two main categories:
- concessional (pre‑tax) contributions
- non‑concessional (after‑tax) contributions.
If you are employed, your employer will generally contribute 9.25% of your salary into super for you (known as Super Guarantee or SG contributions). (2)
Your employer may also agree to ‘salary sacrifice’. This is where you agree give up some of your pre‑tax salary in exchange for additional employer contributions into super. You can also make personal contributions to your own super fund (as well as spouse contributions) from your after‑tax salary, but these do not attract the lower tax rate of 15%.
What types of super funds are there?
There are four main types of super funds:
- Corporate funds: These are funds that are set up by an employer with a financial institution for their employees and often provide group discounts and special member benefits.
- Industry funds: Some of these are open to everyone but if you work in a particular industry or under an industrial award your employer may contribute your super guarantee and other super into an industry fund. These funds often have a limited number of investment options and are usually run by employer associations and unions.
- Personal or retail funds: Retail funds are available to all individuals. They often have a large number of investment options which can be tailored to individual needs. These funds are run by financial institutions.
- Self‑managed super funds (SMSFs): These are often referred to as ‘do it yourself’ funds. The trustees/members manage their own super investments. They are responsible for the investment strategy, operation, administration and compliance of the fund. Your financial adviser can outline the advantages of each and help you decide which type of fund is best for you.
When can you access your super?
The government places restrictions on when you can withdraw your super – known as ‘preservation rules’. These rules ensure your super balance is locked away and continues to grow until you retire or meet a condition of release. This may include reaching your preservation age and choosing to retire, turning 65 or suffering from a terminal medical condition. Your preservation age will be between 55 and 60 years, depending on your date of birth. You can find out what your preservation age is by visiting ato.gov.au or speaking to Rowland Financial Advisory.
Things to consider:
1 Source: Australian Government Actuary Australian Life Tables 2005–2007.
2 The super guarantee rate increased from 9% to 9.25% on 1 July 2013. It will continue to increase gradually each financial year until it reaches 12% on 1 July 2019.
Contact Rowland Financial Advisory for more information.