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Superannuation

Superannuation is a form of savings where money is set aside by you and/or your employer and invested for your retirement.

Your retirement savings grow because money is paid in regularly and invested at a concessional rate of tax. Tax concessions and other government benefits currently make superannuation one of the best long-term investments. Many funds can also pay benefits if you die, or if an illness or accident makes you unable to work via added insurance.

Contributions paid into a complying superannuation fund are typically invested in a range of assets, such as property and shares. A complying superannuation fund is one where the trustees have chosen for the fund to be regulated in a way that gives the fund special tax treatment. This does not guarantee the fund’s capital or investment earnings.

The key features of superannuation are:

    • your employer must contribute 9% of your earnings base to your fund
    • money from your superannuation account can usually be taken out only at retirement, and
    • it is generally taxed at a lower rate compared to other forms of investment.

Making the most of your superannuation whilst you are working is one of the most effective ways to save for your retirement. The combination of regular investments, tax concessions and time makes superannuation a powerful long-term wealth creation vehicle.

There are many ways you can boost your retirement savings. Choosing the right super strategy and increasing your contributions are two of the most effective ways.

Now, with the Federal Government’s Better Super system there are even more incentives to contribute to your super. Features of the new system include tax free super benefits for people over age 60, the removal of reasonable benefit limits and fully tax deductible contributions up to the age of 75 if you are self-employed.

Here are a few reasons why super is so important:

    • you’re saving for your retirement lifestyle. Your super provides you with a pension or lump sum when you retire. The more you contribute to super the better off you will be when you retire;
    • it’s compulsory for most working Australians. Compulsory employer super contributions alone may not be enough to fund your desired retirement lifestyle. This is especially true if you have taken a break from the workforce;
    • it’s your money. Over your entire working life your superannuation can accumulate into a significant sum of money. Because super is automatically deducted from your pay and you never see it many people fail to take control until it is too late. Most Australians now have a choice of where and how they invest their super;
    • future governments may not be able to provide the same level of aged welfare they provide today. Not only are we ageing as a population but retirement itself is lasting longer as life expectancy improves. According to the Government’s discussion paper, Australia’s Demographic Challenges, in 2002 there were more than five people of working age supporting every person aged over 65. By 2042, this is expected to drop to 2.5 people of working age to every person aged over 65;
    • for many Australians, super will be the largest asset they own outside of their home; and
    • super offers excellent tax concessions, making it a difficult investment to beat. Super contributions and investment earnings on your super savings are taxed at a maximum of 15 per cent. The tax benefits of super can make a significant difference to the amount of money you will have when you retire compared to investments outside super.
    • Best of all, you can access your super tax-free when you retire.

Types of Contributions

Contributions are broken-down into two basic areas:

1. Concessional Contributions

Superannuation Guarantee (SG)
All employers are required to provide minimum super cover for eligible employees known as the SG. The SG was introduced in 1992 to relieve some of the retirement funding burden from the Government and to encourage people to fund their own retirement.

The current SG level is nine per cent of your gross salary and it applies to full-time, part-time and casual employees who earn more than $450 a month (certain exceptions apply under the law). If you’re covered by an industrial award this amount may be higher.

Salary Sacrifice
Many employers offer salary sacrifice, a simple strategy where your employer contributes a portion of your pre-tax salary into super on your behalf. This contribution usually attracts a tax of just 15 per cent, much less than the average marginal tax rate. That’s why salary sacrificing is such an attractive option to boost your retirement savings.

Instead of investing that money outside super and paying a higher tax rate, you can contribute it to super and invest more for your long-term future.

If eligible, a tax deduction can be claimed for up to $50,000 for people aged under 50 (including the self employed). For those over 50, this limit increases to $100,000 a year until 2012.

Self-Employed
The Government’s more generous annual limits under the Better Super system have made super an even more attractive investment for the self-employed. Self-employed people under 50 years of age can claim a full tax deduction on up to $50,000 a year. People over 50 years of age can claim a full tax deduction on $100,000 a year between 1 July 2007 and 1 July 2012, reducing to $50,000 from 1 July 2012.


2. Non-Concessional Contributions

After Tax Contributions
You can also make your own after tax contributions, otherwise known as non-concessional or personal contributions. No tax is deducted from the contribution when invested as you have already paid income tax on it.

When you retire there is no tax payable on the amount invested. However, tax is still payable on the investment earnings at a rate of 15 per cent along the way. A limit on after tax contributions of $150,000 a year applies from 1 July 2007. This limit can be averaged over three years, so you can make a single lump-sum contribution of $450,000 by bringing forward the next three years’ contribution (this will only apply if you are 64 years of age or less).

Spouse Contributions
Contributing to super on behalf of your spouse is a tax-efficient way for a couple to save for retirement. If you are employed and your ‘eligible spouse’ is either not working or earning less than $13,800 a year, you can contribute to their super and gain certain tax benefits.

There is no limit to the amount you can contribute on behalf of your spouse (provided the contribution to their account does not exceed the limit on non-concessional contributions). But you can only claim a rebate of 18 per cent on contributions of up to $3,000 made to a complying super fund on your spouse’s behalf.

This tax benefit reduces when your spouse earns more than $10,800, including reportable fringe benefits, and is zero when your spouse’s assessable income reaches $13,800 in a financial year. Spouse contributions are subject to the non-concessional contributions limit.

Government Co-Contribution
This is a Government-funded program to help those on lower incomes save for their retirement. If you earn less than $58,980 a year and make personal contributions to super, the Government will match these contributions up to a certain limit.

For example, if you earn below $28,980, the Government will match $1.50 per dollar contribution to a maximum of $1,500. This reduces progressively to no additional contribution at $58,980.

There is no need to apply for the co-contribution. The ATO will use details from your income tax return and contribution information from your super fund or retirement savings account to work out whether you are eligible. If you fall within the limits, the co-contribution will be calculated and deposited into your super account. It is not taxed when paid into your account because it is treated as a non-concessional contribution. The co-contribution will not be counted towards the non-concessional contributions limit.

What Types Of Superannuation Funds Are There?

Superannuation funds are set up under a trust deed. Trustees run the fund and, by law, they must act honestly and prudently, and make decisions in the best interests of all members.

There are four basic types of superannuation fund:

  1. corporate funds, which are open to people working for a particular employer or corporation (including public sector funds)
  2. industry funds, which are open to people in a particular industry or under a particular industrial award (some industry funds are open to anyone)
  3. retail funds run by financial institutions, which are open to the public, and
  4. self managed superannuation funds, which are open to up to four people.

Your Equiti financial adviser can help you determine which superannuation fund may be best for you and can help demonstrate the various ways in which you may be able to best take advantage of this efficient wealth creation vehicle known as superannuation.

Superannuation: For Today, For Tomorrow.