Hot super tips on how to become a super hero with your superannuation
I love superannuation. That’s a super-nerdy thing to say I know, but once you understand it too, you’ll realise how super it can be. Enough of the play on words already!
Your overall retirement position looks at your superannuation savings, estate planning wishes, assets outside super, debt, wealth protection strategy, spending needs and the Age Pension – a bit like pieces of a puzzle – but for this article I’m going to focus on superannuation.
So, what is superannuation? Some would say it’s a nest egg for their retirement and some would say it’s an investment option. Some people say they “lost money in the GFC” and that superannuation is bad. However, what they don’t understand is that superannuation is just a tax structure, and if you know how to work with this tax structure, you’ll be the super hero of your own story.
A tax structure you say - tell me more!
There are 3 pillars to the superannuation system — the Age Pension, compulsory savings through the superannuation guarantee and voluntary superannuation savings.
Superannuation is a trust that is concessionally taxed which means that taxes are levied at a special rate in the form of exemptions, postponements, or a rate lower than the usual tax rate. The tax concessions were designed to encourage you to save for your retirement and reduce reliance on the Age Pension, which is arguably a safety net.
There are 3 phases of superannuation taxes.
Contribution phase (money in)
Withdrawal phase (money out
1. Contribution phase (money in)
These are split into concessional contributions and non-concessional contributions.
Concessional contributions include superannuation guarantee contributions, salary sacrifice and personal tax deductible contributions (and notional employer contributions for defined benefit fund members). Non-concessional contributions are post tax contributions. There are contribution caps for both contributions. Concessional contributions attract contribution tax of 15% (up to 30% for those who have an adjusted taxable income of $250,000 or more).
If you were born after 1 July 1964, your superannuation preservation age is age 60 (Age Pension age is 67). This means that if you make voluntary contributions into your super fund, they are generally locked away until you have reached your superannuation preservation age and you have retired.
Whether you should make voluntary contributions into your super is based on your personal goals, financial situation and needs. Something I could help you with if you are thinking whether this might be a good move for you.
2. Investment phase
When it comes to the investment option, you have choice over how much risk you take with your retirement savings. Volatility is inevitable and no one can 100% accurately predict the markets – but there are ways to plan for volatility and to manage risk, which I can also help you with.
Think of it this way. If your property went down by 20%, have you lost money? Well, that depends whether you actually sold your property and locked in that loss or held on to it until the market went back up again. If you were looking to buy property, is it better to buy when the market is down, or when the market is up? This same scenario applies to investing more money in super.
Managing money with regard to ‘super’ is not taught in school so it isn’t surprising that many people make decisions that are often not in their best financial interests such as selling their ‘growth assets’ (e.g. property or shares) to convert their money to cash during times of downturn market volatility. Having locked in their losses, they have missed out on potential future investment returns. Some of these decisions are an emotional knee-jerk reaction to a current volatile financial situation. I can help you manage these emotions so that your financial decisions are always in alignment with your best interests.
As an investor, two key strategies to generate returns on your super that you can choose from are known as passive and active management. Choosing a cheap investment option will not always provide the best net investment returns, nor the most appropriate investment strategy for you.
Furthermore, there are usually pre-mixed investment options to choose from, or asset specific classes that can be selected with MySuper being your default investment option if you don’t make an investment choice. Assets are generally split in to two key asset classes – growth and conservative. Growth assets generally include property and shares whereas conservative assets generally include cash and fixed interest. There are also ‘alternative assets’ which are fancy, non-regular assets.
In the accumulation phase, the investment earnings (e.g. dividends, interest and rental income) are taxed at a maximum rate of 15% (10% Capital Gains Tax on capital growth). This can reduce to 0% tax in retirement. This is why superannuation is an attractive tax vehicle for high income earners. Assets outside of super are taxed up to the 49% marginal tax rate (including Medicare Levy).
3. Withdrawal phase (money out)
Withdrawals from superannuation can either be made as a lump sum or an income stream. There may be taxes on the lump sum and pension, if withdrawn before the age of 60. However, after age 60, they are tax free (unless you have an untaxed component such as DFRDB, MilitarySuper, CSS or PSS benefits). Retirement is the key reason for withdrawals but other ‘conditions of release’ include permanent disability, death, hardship, changing employers after age 60 and reaching age 65.
5 key types of superannuation funds
Company (corporate) funds
Created by an employer for employees (e.g. Telstra Super).
Industry funds were originally created for a defined industry. For instance, MTAA was created for the motor industry and HESTA was established for the health and community services sector. However, most industry funds these days are ‘public offer funds’ where anyone can join the fund. They focus on generating profits for their members, so they are not ‘not-for-profit’.
These public offer funds were established by the retail industry. They generally provide very broad service and investment options, with some retail funds offering very attractive fees.
Public sector funds
Notably a popular fund in Canberra, they are for government employees and are usually closed to the general public.
Self Managed Superannuation Funds (SMSF)
This is where the beneficiary of the fund (you) is also the trustee of the fund. Accountants, financial planners, auditors and actuaries are needed to help you manage the fund, but you cannot delegate the responsibility of being the compliant trustee. Some key unique features of a SMSF are that you can invest in direct property, unique assets such as paintings, and business real assets. Personally, I think SMSF are becoming less attractive due to high costs, tightened gearing and increased regulatory requirements.
See the ATO website for SMSF education videos
Small APRA funds
Similar to SMSF except that APRA is the trustee of your fund.
The superannuation rules are complex and attract high penalties if not done right. Retirement planning needs to consider your broader financial situation too, not just your superannuation fund balance.
Contrary to the advertisements on TV, industry super funds are not always cheaper than retail funds. Cheaper is not always best and a lot of people are reviewing whether their existing SMSF is still appropriate for them.
If you would like to chat more about your superannuation and how it fits in to your overall retirement plans, have a chat to your accountant (if you have a SMSF) and book in your complementary appointment with me, at a date and time that’s convenient to you. I provide financial advice to clients who have all 5 types of superannuation funds and I would be happy to give you direction with yours.
Gianna Thomson and Thomson Wealth Pty Ltd ACN 626 920 161 trading as Gianna Thomson are authorised representatives of Fitzpatricks Private Wealth Pty Ltd, ABN 33 093 667 595, AFSL 247 429. This is general information only and does not consider your personal circumstances, needs and objectives. It is important you seek advice from a professional financial adviser prior to making any decisions.