While the term of superannuation is often in the media, and most of us have some, do we know how it works and how it will benefit you?
Your super will fall into one of the following categories:
1. Industry based superannuation, these are the likes of REST, HESTA, MTAA, etc. These funds were set up for specific industries and if you work or have worked in any of the related industries you will most likely have or have had super in these funds.
2. Corporate or Public-Sector Funds, these were created for Government or large company’s employees.
3. Retail Funds, these were set up by financial institutions and insurances companies, for investors to save for retirement and the likes of Colonial First State (Commonwealth Bank) One Path (ANZ) AMP Flexible Super BT Super for Life (Westpac) etc
4. Self-Managed Superannuation Funds – these are superannuation funds you can set up and run yourself.
While there are different categories of funds they are all set up and run with the goal of providing for your retirement.
So how do they work for you?
Your employer contributes a minimum amount of super for you currently this amount is 9.5% of your income and if you are lucky they may contribute additional amounts. Or you could be contributing some yourself. If you are self employed you may be making contributions on your own behalf.
Once these contributions are received into your super the fund will pay tax on 15% of the contributions.
The net amount is then available for investing by the fund managers or trustees:
Where they invest it for you will depend on a number of things:
1. The investment options available under your specific fund.
2. Your risk profile, you should complete a risk profile to determine your tolerance to risk in line with your investment objectives and your time horizon to retirement.
3. If you have a Self Managed Superannuation Fund it should be in line with your investment strategy.
The income from these investments will be credited back to your superannuation account, after the investment managers have charged a fee for their services. Its important not to get too hung up on the performance of your fund in the short term, history shows that no one fund stays in the top few consistently over a 3, 5 or 10 year period. So keep an eye on your fund and check it regularly and if it is underperforming year and year it might be time to look for an alternative.
You will also generally pay an administration fee and sometimes a trustee fee.
Your fund up until retirement will pay tax on the net investment earnings at 15%.
You may also be able to access Life, total and permanent disability insurance and Income Protection Insurance under your super, and if this is the case the premiums will be deducted from your Member Balance.
As of the end of September 2017 all funds with the exception of Self Managed Superannuation Funds need to disclose all their costs, and you can find the costs for your own superfund in their Product Disclosure statements which are found on each funds website. There are also websites where you can check the fees and compare your superfund such as Canstar and SuperRatings.
So what happens when you want to access your super.
Most of us will not be able to access our super until we are 60. Or those who want to work a little longer it could be later. Then we can either take a lump sum or draw down an income stream. If you decide to take an income stream you will need to draw out a minimum of 4% of your balance each year. The advantage of doing this (under the current legislation) is that your fund now goes into pension phase and all earnings are no longer subject to tax. In addition, the income that you draw is not subject to tax either. Pretty nifty hey?
This is a basic overview of how superannuation works today in Australia, let me know if you would like to know more.
This article is intended as a source of general information only and no reader should act on any matter without first obtaining professional advice
Michele Purvis is an advisor with over 30 years experience working in the accounting and financial services industry helping clients to define and create their wealth.