Is your super being maximised?

For many Australians, super is a complex area that they only think about as they near retirement. We aim to help by explaining the basics about super and how you can keep your nest egg on track.

What is super?
According to the Australian Securities and Investment Commission (ASIC), superannuation is a tax-effective way to save for your retirement, where your savings are pooled with those of other fund members and invested on your behalf. Your employer must make contributions – currently 9.5 per cent of earnings – to your nominated fund if you earn at least $450 per month before tax. There are also ways to boost your super balance by making additional pre- or post-tax contributions.

What are the main types of super funds?
There are three main types of superannuation: self-managed superannuation funds (SMSF), which are regulated by the Australian Taxation Office (ATO); industry funds, which are not-for-profit funds, and bank-owned or retail funds, which are managed by finance-sector companies. Industry and retail funds are regulated by the Australian Prudential Regulation Authority (APRA).

Then there are several other types of funds similar to superannuation, such as eligible rollover funds and exempt public sector superannuation schemes.

When should an SMSF be considered?
An SMSF should only be considered after receiving professional financial advice. These funds need to be managed to produce income on retirement. Generally, you would need to start with a balance greater than $200,000, which would be reinvested in income-producing investments, such as shares or property.

In some situations, a single SMSF could be set up to take care of the retirement needs of multiple members of a family. The members of the SMSF are also the trustees and must adhere to strict rules enforced by the ATO, which warns: “Don’t set up an SMSF to try to get early access to your super, or to buy a holiday home or artworks to decorate your house. These things are illegal.”

How are contributions made to standard superannuation funds?
Non-concessional contributions
are after-tax deposits into your superannuation. These contributions are not taxed in your super fund as long as they do not exceed a total of $100,000 a year. Spouse contributions made on your behalf will also count towards the $100,000 cap. If you exceed this cap, you may have to pay tax. If the total balance in your super is more than $1.6 million, you are no longer entitled to make non-concessional contributions.

Australians aged 71 and under who are low wage earners and have a small balance in their fund may be eligible for the Super Co-Contribution. Under this scheme, the Government will contribute between $20 and $500 a year to your fund, depending on how much you earn and the level of your own super contributions. These also count towards your non-concessional limit.

Concessional contributions are deposits made into your superannuation that have not been taxed. Once the contributions are in the fund, they are taxed at 15 per cent. Caps also apply to these deposits and if exceeded, tax may be payable.

Under a salary-sacrifice arrangement with an employer, the employee foregoes part of his or her pre-tax wages in favour of having the amount deposited into super. This is often tax-effective for the employee.

How much can you contribute while working and not working?
You can contribute up to $25,000 of salary-sacrificed income into your super as a concessional amount, which includes the 9.5 per cent SGC. If your super balance is less than $500,000, and you contribute less than that cap, you can carry forward the unused amount for up to five years. You can contribute up to $100,000 in non-concessional amounts a year before attracting extra tax.

Voluntary contributions to super can be made up to the age of 74. But if you are over 65 and wish to continue contributing, you must satisfy a work test.

How the ‘downsizer’ legislation works
The so-called ‘downsizer’ legislation allows people who are 65 and over to deposit up to $300,000 into their super after selling their principal residence if they are single, or $600,000 if they are a couple. They must have owned the home for 10 years or more and have sold it on or after 1 July 2018.

This contribution is not a non-concessional contribution and will not count towards your non-concessional cap or the total super balance test.

When can you access your superannuation?
When you turn 65, you can access both your preserved and unpreserved super, even if you have not retired.

You can access a portion of your super when you reach preservation age, which is 55 if you were born before 1 July 1960. Thereafter, the preservation age scales up to 60 years if you were born after 1 July 1964.

What does Transition-to-Retirement mean?
From your preservation age, you can also receive a Transition-to-Retirement income stream from your super while continuing to work. The stream must be more than four per cent but less than 10 per cent of the fund balance at the start of the financial year for any given 12-month period.

Why do you need to consolidate your super into one fund?
One simple reason – you save on fees. Additionally, it may streamline the process if you were to claim from any insurance policy within a fund.

Is life insurance offered through super worthwhile?
Even before reports of misconduct emerged from the financial services royal commission, whether life insurance through super was beneficial was a moot point. The policies are affordable as they are automatically deducted from contributions. But ASIC points out that they offer limited cover, are not portable, can be slower to pay out, tend to end at age 65, and if you have more than one super account, you will be paying for multiple premiums.

Which is the best super fund for you beyond just returns and fees?
Many websites can help you compare funds, but not all offer a full range of independent choices. Among the more reputable are SuperRatings, Canstar, Cannex, Chant West, Morningstar, RateCity and SelectingSuper.

The Government’s MoneySmart website recommends that you research funds before swapping and, in addition to fees and performance, compare the risk level of investment options, the type of insurance and other services offered.

How does super combine with an Age Pension?
When you become eligible for the Age Pension, your superannuation balance is counted in the asset and income tests. If you withdraw money from your super and use it to buy an income stream or deposit it in a bank, this will also be income and asset tested.

Under the income test, if you are single and receive more than $172 a fortnight in income, including from investments, your Age Pension is reduced by 50 cents for each dollar over $172. For couples, the threshold is $304. Under the assets test, Age Pension eligibility is reduced by $3 for every $1000 your assets – including super – exceed the thresholds applicable to your situation.

Whichever of these test calculations yields the lower payment will be the amount of Age Pension you receive in addition to other income.

Do you know of any other tools or rules to boost your super savings? 

Written by Olga Galacho

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