Contributing, managing and accessing your super comes down to thorough planning, good advice and specific timing says David Shirlow.
To make personal contributions, you must be under 65 and either gainfully employed for at least 10 hours each week, ceased employment due to ill-health, or be a parent or guardian on leave for less than seven consecutive years to raise children. Your employer may also contribute for you in these circumstances.
Further, if you are under the age of 70, your employer may make Superannuation Guarantee (SG) and award contributions for you, irrespective of whether you are eligible to make personal contributions.
Your spouse, if living with you on a genuine domestic basis, can also contribute on your behalf, provided you are either below age 65 or aged from 65 to 69 and employed at least 10 hours a week. This includes de facto spouses, but not permanently separated spouses.
Similarly, you can make spouse contributions on behalf of your spouse, provided they are eligible on this basis.
In addition to making new contributions to super, you may also invest eligible termination payments that are rolled over from another superannuation entity, your employer, or from the sale of certain small business assets.
What to look for in a super fund
You need to check your portfolio produces the right returns for your investment goals, and your insurance and estate planning are up to date.
You should treat super as you would your entire portfolio. Diversification is the key tool for managing any risk. Many funds offer diversified investment portfolios, which spread your investments across asset sectors and countries.
While asset sectors and countries are unique in the way they respond to market forces, so too are fund managers. Managers tend to have strengths in different areas and offer varying styles of investing. By diversifying across a range of investment managers you lower the risk that one poor performer in a certain period will lower your overall return. You should also look for a competitive fee structure and make sure there are no exit fees.
Estate planning
Check whether your fund offers you the ability to nominate which of your dependents and/or estate will receive benefits in the event of your death. Check to see whether or not this nomination is binding on the trustee of the super fund. Binding nominations provide you with added security that generally the person you choose will be the person who receives your benefits (provided they are a dependant or executor of your estate). Also check to see how often your binding nomination lapses, in most cases a binding nomination will lapse every three years, however in some circumstances you can have a nomination that doesn't lapse.
When you retire
An effective means of providing retirement income is to have an Allocated Pension. Effectively, no tax is payable on the investment earnings credited to an investor’s allocated pension account. The pension payments made from the account are taxed at normal marginal tax rates except that part, or all, may be tax free or attract a 15 per cent tax rebate.
The tax free component typically represents a return of contributions made to superannuation which did not attract a tax deduction (for example certain personal contributions). These contributions are known as "undeducted contributions". A fixed proportion of these contributions is returned to the investor each year on a tax free basis, based on the investor’s life expectancy.
For example on 1 July 2001 Ian, aged 65, purchases an allocated pension with $400,000, $100,000 of which is undeducted contributions. Ian’s life expectancy is 16.21 years. His tax-free component each year is calculated as:
Aside from the tax free component, the balance of Ian’s superannuation pension payments are taxable. However, provided his total superannuation-related benefits are within government limits all of these taxable payments will attract the 15 per cent rebate.
Ian may also be eligible for other tax rebates. The result is that from 1 July 2001 an investor whose sole source of income was from allocated pensions could receive around $30,363 of taxable allocated pension payments each year without paying tax. This is because the rebates, including the Senior Australian Tax Offset and the 15 per cent pension rebate, offset any tax payable up to that level of income.
To show how tax advantages work together. Ian chooses to take $35,000 income in the first year. As shown above, $6,169 of that is the tax free component. The balance, $28,831 is taxable but attracts the 15 per cent rebate. The result is Ian pays no income tax in the year 2001/2002 if this is his sole source of income. He pays $433 Medicare levy.
Income splitting with superannuation
Income splitting is a commonly acceptable means of reducing the total tax bill of a retired married couple. It is increasingly common, and much easier, for both spouses to have superannuation. This means that, through the use of allocated pensions and other superannuation pensions, retirees can income split using their superannuation.
You can generally make a superannuation contribution for your spouse if they are under age 65 whether or not they are working.
Take Ian and Mary for example. As we discovered, Ian has an allocated pension that generates tax free income of $35,000 in the current year without paying tax. Let’s assume that his wife, Mary, is 64 and has never been in the paid workforce. Together they have at least another $400,000 available to invest for retirement, aside from Ian’s allocated pension investment.
If those funds are in Ian’s name, he may make a spouse contribution of $400,000 to Mary’s superannuation account. This is classified as an undeducted contribution. This means part of each year’s pension payment will comprise a return of those contributions which qualifies as a tax free component. In the first year Mary is 65 and chooses a pension of approximately $35,000, on which she pays no tax, assuming she had no other source of income.
Using complying superannuation pensions
"Complying pensions" are paid from a superannuation fund and last for either your lifetime or a period based on your life expectancy. They generally pay a fixed rate of income, possibly with indexation. They are constrained by a number of government limits and are less flexible than allocated pensions but can attract social security and tax advantages.
If you are wholly or partly disentitled to the age pension or some other social security benefit because of the assets test, there is additional incentive for you to consider purchasing a complying superannuation pension.
The reason is the amount used to purchase a complying pension is not counted as an asset. Thus, buying a complying pension can reduce the level of assets counted under the assets test. For many people, this means their annual age pension entitlement can be increased by up to 7.8 cents for each dollar invested in the complying pension.
The government sets limits on the amounts of superannuation benefits a person can take on a favourable tax basis. Currently, the standard limit is $529,373 value of relevant superannuation-related benefits. Generally, by purchasing a complying pension with at least 50 per cent of your relevant super benefits, you can increase this limit to $1,058,742.
Taking lump sum benefits
If you have worked in a number of different places it is possible that you have more than one superannuation benefit accumulating in different funds. If one of those commenced prior to 1 July 1983 it is likely that it will have what is known as a "pre July 1983 component". Only five per cent of this component is taxed, at your marginal rate.
If you have another benefit that relates to employment starting after 1 July 1983, then this will not have a pre July 1983 component.
You may arrange to roll benefits from one fund to another so that your benefits are combined. The advantage of this, prior to withdrawal of a lump sum, is that you’ll increase the size of the pre 1 July 1983 component and therefore increase the total portion of your benefits of which only five per cent is taxed.
Timing Your Lump Sum Withdrawal
If you want to withdraw your superannuation as a lump sum, the timing is important. You need to consider your age (you pay a higher rate of tax on withdrawal prior to age 55) as well as the time of the year you are making the withdrawal.
If you withdraw any of your post June 1983 component from a taxed fund prior to your 55th birthday tax is deducted at 21.5 per cent (including Medicare levy) on the total amount.
However, there are at least two taxation benefits if you withdraw on or after age 55:
- You are entitled to a tax free threshold ($105,843 in 2001/2002), which means you can withdraw up to that threshold tax free; and
- Even if your post - June 1983 component exceeds the threshold the rate of tax payable on the excess is only 16.5 per cent (including Medicare levy), which is still lower than the tax payable if you are under 55.
Leaving money in super is often a more tax effective way of growing your investment because super fund earnings are taxed at 15 per cent. Your marginal tax rate may be higher than this.
David Shirlow, Technical Manager,Macquarie Financial Services
Ph: 8232 6442
Web www.superannuation.asn.au
PROTECTING YOUR SUPER
Superannuation has moved from a limited savings device for the elite to a compulsory but popular retirement savings system covering virtually the entire wor
kforce. Philippa Smith looks at its rise and rise.
The Super Guarantee paid by employers on behalf of their workers is currently eight per cent of wages and this will rise to nine per cent in July this year.
Super savings are now an integral part of the economic life of all Australians, being in most cases the second most important financial asset after the family home.
Despite some speculation about the safety of super given the HIH insurance debacle, the vast majority of super is well managed and safe. Superannuation’s strong security record is due to good safeguards and laws in place and these are currently being reviewed to enhance the protection of workers’ compulsory savings.
It helps to know what these super safeguards are, since member awareness is beneficial for everyone.
First, superannuation funds are legally required to provide detailed written information to their members every year. If you don’t get this information, or it doesn’t tell you enough, it may be a sign of poor administration or other problems.
Second, there are two regulators, or watchdogs, which supervise superannuation funds – APRA (The Australian Prudential Regulation Authority) and ASIC (The Australian Securities and Investments Commission). They have powers to collect information from fu nds, to review fund operation and they can set in train severe penalties for funds breaking the law.
Third, your superannuation fund is managed by trustees, who are responsible to the members of funds. Their role is to maximise members’ retirement income, not the profit of shareholders.
Trustees of superannuation funds come in two forms. The trustee board must either have:
- equal representation from the members (you) and the employer; or
- the trustee must be approved by the regulator (for instance, a professional trustee or trustee company).
Generally super funds set up for the employees of a company or an industry will have the equal representation model. Funds set up by financial institutions like banks have a trustee approved by the regulator. Some ?industry funds’ have both an approved trustee and equal representation as well.
Trustees must satisfy certain conditions - they must never have been convicted of fraud or theft and cannot be bankrupt.
The trustee directors of your fund make the ultimate management decisions, but they generally seek expert investment advice and hire specialists to undertake the day to day tasks like administration and investing the money. Selecting and monitoring the specialist companies that do this work is a major obligation, or duty, of the trustee.
The law also says that:
- Trustee directors cannot invest in something that might happen to be good for them, their mates or the employer, but not necessarily for the fund members;
- Trustees must keep the super fund money separate from their own or the employer’s money;
- The super fund can’t have all its eggs in one basket. Its investment strategy must take into account the risk of any investment, the need for cash flow, and diversification;
- Trustees can’t make loans to members and there are tight restrictions on the fund borrowing;
- There are strict limits on the amount the fund is allowed to invest in the employer’s company or associated companies. This is to prevent double jeopardy - if the business failed, the retirement savings would also be lost along with unpaid wages or entitlements.
Tips and Traps
Besides all the rules, protections and safeguards, the bottom line for super fund members is it is YOUR money and you have a right to know what is happening to it. Here are some things you can do to keep an eye on one of your biggest investments.
- Look out for your annual member statement - make sure it arrives on time (delays can mean problems)
- Read your super fund’s annual report, paying particular attention to:
- the auditors’ report and any statement casting doubt on particular fund investments
- the range of asset classes (eg shares, bonds, property, cash) the money is invested in. Diversification reduces risk. The fund’s money should not be invested in only one or two companies or properties.
- does the trustee have indemnity insurance?
- what did the fund earn and are benchmarks provided to help evaluate this?
- Ask for more information if the material supplied is not enough to know what’s happening to your money. If the fund refuses to provide additional information or you don’t get replies to inquiries made by phone calls, faxes and e-mails to fund, this may indicate problems.
- Look at who is associated with the management of the fund. Funds associated with employer and union organisations or run by large financial organisations and/or who make use of independent advisers generally have appropriate supervision and back-up.
- Beware of an "adviser" who claims you really don’t need all that information because they are taking care of things for you or who claims to be able to get around the usual tax rules.
- Beware of funds offering very high "guaranteed" investment returns or unbelievable tax concessions. Remember the old maxim "If it sounds too good to be true, it probably is."
- For concerns, phone the regulator, APRA (Australian Prudential Regulatory Authority). Ph 1300 131 060
However, although the rules, the regulators, and member watchfulness provide considerable protection, you should look at how much you are saving. Not saving enough is a much greater threat to contentment in retirement than fraud or theft along the way.
Unfortunately we know that most people are not currently saving enough to meet their aspirations for what is likely to be 20-plus years in retirement. The nine per cent Super Guarantee, while a lot better than the age pension, will not be enough.
The only way to ensure a retirement income that will meet your lifestyle needs is to make additional voluntary contributions to super, as early as possible.
You might also be wondering, is a self-managed, or DIY fund the best way to go, or should you put your money into one of the big retail or industry funds?
DIY super can be done in one of two ways – through a SAF (small APRA fund) with an APRA Approved Trustee or through a self managed super fund (SMSF) with the members acting as trustees.
Ultimately you must decide which is the best superannuation option for you, taking into account how much time and energy you have to devote to it, how financially savvy you are, and how much you can afford to spend on fees, and management expenses.
If you think a self managed super fund, also known as DIY fund is for you, you will need to consider whether you have the necessary time, skills, and interest to invest the money and meet the regulatory requirements. You will also need to consider overheads (eg APRA/ATO fees, accountant) which can be high.
Whatever choice you make, make sure it is an informed choice – you owe it to yourself and your retirement future.
Philippa Smith, CEO of ASFA – The Voice of Super (Australian Superannuation Funds Association)Ph: 1800 812 798
Web www.superannuation.asn.au
These article and many more,
were in the
(15th edition) of Your
Retirement, Your Life.
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