What is Superannuation? [2021 Update]
A lot of people ask me, “what is superannuation?”
In Australia, superannuation was introduced by the Hawke-Keating Labour Government in 1992 to address a big demographic dilemma the Western world was facing; there was less and less tax-paying people trying to support a larger and larger retirement community.
The feeling was that it would become so burdensome to the government and taxpayers that they needed to introduce a scheme to support the retired and their retirement needs.
With Keating’s superannuation scheme, a percentage of a person’s income is placed into a dedicated retirement fund by their employer. This contribution is currently 9.5%. This is a portion placed by your employer into your super, based on your income, and not taken from your earnings.
For example, if you earn $100,000 a year. 9.5% means that $9,500 is placed into a superannuation fund on your behalf by your employer.
Does the superannuation scheme work?
Depending on who ask, there are varying degrees on the success of superannuation.
Personally, I think it’s been incredibly successful and an extremely good move by the government. I see the benefits with my clients every day.
To give you an idea of the impact the scheme has on the future economy, as of December 2020, there was $3 trillion worth of assets in Australian superfunds, making it the 4th largest pool of retirement funds in the world.
At the moment mandatory contributions are 9.5% of salary, but that is going to gradually increase to 12%, so we’re accelerating, and that overall pool of funds will grow steadily larger—great for you and for the economy.
What happens to super while it’s sitting in a fund?
There are a lot of nuances around superannuation, but generally speaking, it stays there until you you have reached the Superannuation age of retirement (age60) and have legitimately retired, then your accumulated Super is transferred to a pension phase account and you can take it out tax-free.
While taking super out in retirement is tax free, super contributions are taxed. Contributions are tax-preferential at 15%.
Considering that the Australian tax rate in 2020 for a person earning between $18,201 and $37,000 is 19%, your super contributions are a lot better off.
Out of all the money you earn, all the capital gains, all of the income that you earn from those investments, that’s an incredible sum of money.
Then, when you reach retirement age and retire, you can take it out as a lump sum (tax free) and go on a big holiday. The scheme’s already been an incredible benefit to people who are already accessing their super.
Superfunds grow this money through investments while you keep on working and making contributions.
Most people are in default funds, which are usually very Australian-orientated, and tends to be invested in financials and commodities.
Luckily, there is flexibility.
Your super investment $$ doesn’t have to stay Australia; it can go international. There is also a broad spectrum of investments. You can invest in money markets, debt instruments, property, securities, and of course, stocks, directly off the stock market.
Are super contributions automatic?
In 2020, there is far more flexibility when it comes to superannuation and super contributions.
There are some industrial award systems which will limit your choices, but effectively, you have unlimited choices regarding your super.
Most people tend to use their employer’s or industry’s default super because they’re too busy with their work, and they might believe that one super is as good as any other. But there are a few problems with that.
One problem occurs when you switch employment. It’s easy to collect lots of superannuation funds, and you’ll find very quickly that your superannuation will get very complex.
I have a client in his early 20s and he already has 7 different supers. There’s no reason for his super to be so complex.
The government has recognised this and has provided easier access to consolidation tools.
You can also make concessional contributions.
The 9.5% provided from your employer is concessional, but you can also make your own contributions from your income after tax.
There are even some incredible benefits to making these contributions yourself.
For people that earn under $37,000, the government will give you 50 cents for every dollar you add to your own superfund. I highly recommend doing this, especially for students. You really should take advantage of this benefit.
But there is a cap of $500. So, if you put in $1000, the government will give you $500, making the total contribution $1500. But if you put in $2000, the government will still only give you $500.
It’s a win-win. You’re getting $500 because you’re saving for your future at a young age, and your future self will certainly thank you for all the extra contributions. Don’t miss the opportunity!
Can you access your super early?
There are ways to access your super early under financial distress, but it’s not easy. You can’t get your super just because you have a high credit card bill.
Another way, is a transition to retirement scheme (TTR) and with these you can access a portion of your Superannuation from the age of 55.
My suggestion for anyone who needs to withdraw super early is to talk to a financial advisor. They will be able to help you assess your situation and find the best solution for you.
Superannuation is there for your retirement, , not as a pool of cash to access all the time.
- Your super money will help you live comfortably into retirement.
- Super contributions are taxed at a lower rate than your income.
- You can (and should) make non-concessional contributions to your own fund, particularly if you earn under $37,000.
- Check that your superfund is investing appropriately for you.
- Consolidate your super if you have access to multiple funds.
- Speak to a financial advisor if you think you need to access your super early.
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This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.
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