20 questions

Here’s Money’s introductory guide to what’s good and not so good about super and how to avoid common pitfalls

STORY PETER FREEMAN

GREG BAKES

Superannuation is the centrepiece of Australia’s retirement savings system and super funds currently hold more than $1.4 trillion on behalf of their members. But while virtually all working Australians, as well as many retirees, have money invested in superannuation, it is likely many have only a very general idea of what superannuation is and, more importantly, are unaware of how to get the best out of it.

To help address this knowledge gap, Money attempts to answer 20 of the more important questions about superannuation – what it is, what’s good and bad about it, what the main rules are and, in particular, what you need to know to avoid making costly mistakes.

The answers were compiled with the assistance of Alex Dunnin, the director of research at Rainmaker Information, whose subsidiary, SelectingSuper, recently released its latest guide to Australia’s super funds.

Q1: What is superannuation?

Most countries have some sort of national retirement savings scheme but, whereas these are generally referred to as pension, provident or retirement savings schemes, in Australia we call ours superannuation (or super for short). The term presumably comes from “superannuate”, which generally means to retire someone with a pension.

In most cases an individual’s superannuation entitlement at retirement is the result of ongoing contributions, made mainly by their employer, together with the earnings made from investing this money.

Most contributions are paid into one of the more than 350 public super funds run by organisations such as banks, life insurance companies, specialist fund managers, industry groups and trade unions. Some is paid into much smaller, privately run self-managed super funds and some into corporate funds that restrict membership.

Q2: What’s good about it?

The best thing about superannuation is the tax breaks it enjoys. Contributions made out of pre-tax income by people earning no more than $300,000 a year are taxed at just 16.5% (including the Medicare levy). The 1.2% of taxpayers who earn more than this are hit by a tax rate of 30%. In all cases income earned when super is invested is taxed at 15%, while any capital gains are taxed, in effect, at 10%.

As well, most people don’t pay any tax on their super when they eventually withdraw it as a lump sum or a pension.

Most people can also access super’s investment tax concessions by making personal non-deductible contributions out of after-tax income. The maximum allowed is $150,000 a year or $450,000 in any three-year period.

Super funds usually also offer discounted prices on life, disability and income protection insurance, although getting a payout can be a slow process.

Q3: What’s bad about super?

The worst aspect of superannuation is the fact your money is locked up, usually until you meet a so-called “condition of release”. For most of us this rule means we don’t get our super until we retire. The main exception is the concession that allows you to withdraw your super once you turn 65, even if you are still working.

The bottom line for someone in their twenties or thirties is that the money they have in super can’t be touched for a very long time.

Q4: Does my employer have to contribute? How much?

All employers have to make superannuation contributions on behalf of virtually all their employees. At present the compulsory employer contribution is equal to 9% of an employee’s earnings base (that is, earnings before overtime). This will rise to 9.25% from July 1, to 9.5% in 2014-15 and then by 0.5 percentage points a year until it reaches 12% in 2019-20.

Q5: Do I have to make personal contributions?

No, but if you are under 65 you have the right to contribute to super irrespective of whether you are in paid employment. Once you turn 65 you have to work at least 40 hours in 30 consecutive days in the financial year in which you contribute. Those 75 and over usually can’t contribute at all.

Q6: What does salary sacrificing into super involve?

Salary sacrificing into super involves arranging with your employer to direct part of your pre-tax salary directly into super. These contributions will be taxed when they go into the fund at the usual 16.5% rate. The maximum you can contribute tax-effectively to super each year, including the compulsory employer contributions, is $25,000. There are also limits on after-tax contributions (see question 2).

Q7: What about the superannuation co-contribution?

The co-contribution delivers a government-funded super contribution for every dollar of after-tax income you contribute to super up to a set maximum. For 2012-13 the maximum co-contribution has been cut to $500 (it was originally $1500) and the government now contributes only 50¢ for every dollar of personal contribution.

Those earning no more than $31,920 can get the maximum co-contribution, which then reduces until it cuts out completely when your income reaches $46,920.

Q8: Are there any other super concessions for low-income earners?

Not at present, but from July 1 people earning less than $37,000 a year will become eligible for an annual government super contribution of up to $500. This represents, in effect, a refund of the 15% tax paid on the compulsory superannuation contributions made by their employers, although the scheme will also apply to the self-employed who make their own tax-deductible super contributions. As with the co-contribution, you don’t have to apply to get this contribution because the tax office will process it automatically.

Q9: How safe is my super?

Australia’s well-developed regulatory system means the risk of outright fraud is low. But it isn’t zero, as highlighted in 2009 by the fraud of Trio Capital, then the APRA-licensed trustee of five registered super funds.

The bigger risk is that the assets your super fund manager invests in perform poorly over the long term, resulting in a disappointing retirement payout.

Q10: Can I choose which super fund I use?

Many employees have the right to choose which super fund their employer’s contributions are paid into. Your employer or union should be able to tell you if you have this right. If you don’t and are unhappy with your current fund, you might want to make use of the portability rules. These give you the right to transfer the bulk of your accumulated benefit to a new fund.

Remember, even if you don’t have the right to choose the fund your employer’s contributions are paid into, you still will be offered a range of investment options. They will be from the very conservative to ones that take quite a lot of risk in an effort to generate a higher return. If you don’t make a choice your contributions will be paid into your employer’s so-called default option (see question 12).

Q11: Which super fund should I use?

If you have the right to choose which super fund to use, you should take care when exercising it. Make sure you take account of whether the fund you are interested in offers you a suitable range of investment options, how well these have performed in the past, the fund’s fees and whether it offers appropriate life and disability insurance.

Help with these issues can be found at www.selectingsuper.com.au.

Q12: What about MySuper?

From July 1, the federal government will require all superannuation funds to offer a MySuper product as their default option. The super contributions made by your employer will be paid into this if you don’t actively nominate an investment option.

Those who didn’t nominate the super option they are currently using will be switched to the relevant MySuper product.

Under the rules set by the government all MySuper products must offer a single diversified investment strategy, charge no entry fees, have a low annual member fee and charge no inbuilt advisory fees or commissions.

Q13: Should I consider using a self-managed super fund?

A self-managed super fund (SMSF for short) is a fund set up by a few people – usually a married couple – to hold their super contributions. SMSFs can have a maximum of four members and are regulated by the tax office. While an SMSF gives you control over your super, you need to comply with a lot of rules and have the time and commitment to run the fund properly. As well, they usually only save on fees if do you much of the administration yourself and have a reasonable amount – say $200,000 or so – in the fund.

Q14: Do the self-employed get super?

Not in the same way as employees, but they can make tax-deductible contributions to super up to a maximum of $25,000 a year. They can also make non-deductible contributions (see question 2).

Q15: Are government employees given any special super benefits?

Most federal, state and local government employees are covered by the same compulsory super system as everyone else, but their super arrangements can differ in a number of ways. Some public servants belong to defined benefit funds that set the payout as a multiple of their final salary or a similar benchmark.

As well, part of the eventual super entitlement paid to some government employees is financed out of consolidated revenue. This is classified as “unfunded” super and is subject to some tax – usually a rate of 16.5% – when eventually withdrawn.

Q 16: What happens to my super when I change jobs?

Many people forget about their super when they change jobs. Avoid this mistake. Instead, you need to decide either to continue to use your existing super fund to receive contributions from your new employer or, alternatively, transfer your accumulated super to a new fund. It is usually best to consolidate all your super in just one fund.

Q 17: I think I may have lost track of some of my super. How can I find it?

The main way to find lost super is to use the tax office’s SuperSeeker service, either online at www.ato.gov.au or by phoning 132 865. If you don’t find anything, search using www.unclaimedsuper.com.au, a service provided by major industry super funds through Ausfund. If you can remember the name of the super funds you have been a member of, you can try phoning them directly.

Q 18: Can I withdraw all my super and spend it when I retire?

Yes. If you are 60 and retire from your current job – or are 65 and still working – you can withdraw all your accumulated super tax free and do what you like with it.

While that’s a tempting alternative, it usually makes better financial sense to leave all or most of your money in the super system and arrange to draw out a tax-free pension. If you do this, the annual investment earnings on your savings will be completely tax free.

Q 19: What happens to my super if I get divorced?

Your and your spouse’s super entitlements are included among the assets to be divided up between you, but can’t be withdrawn until you retire.

Q 20: What happens when I die?

Your superannuation isn’t regarded as part of your estate and generally isn’t covered by your will. Unless you have made a “binding death nomination” specifying who should receive your super, the fund trustees will decide how it is distributed. In most cases they will pay it out to your dependants. Tax may be payable on part of your super if it is paid to anyone other than your spouse or financially dependent children.

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