Superannuation, often referred to as “super,” is Australia’s retirement savings system. Established by the Australian federal government, it helps Australians build savings throughout their working life, so they can support themselves and their loved ones financially once they retire. Here’s a breakdown of what you need to know.
What Is Superannuation?
Superannuation is a long-term savings plan that encourages Australians to save for retirement. Employers are required by law to contribute a percentage of each employee’s earnings into a superannuation fund – this percentage is currently 11.5% (and subject to change). These payments from your employer, along with any money that you contribute, are invested. Think of it like a superannuation fund being a bank account. Your employer contributes 11.5% of your salary into a superannuation bank account, you pay some money (voluntarily) from your personal bank account into your superannuation bank account and then the money in your superannuation bank account will be invested. The money is then taken out of your superannuation bank account and placed into a term deposit, or shares can be purchased with this money, even property can be purchased with the money (subject to conditions). You can speak to a business accountant, like Nobel Thomas, if you need more information.
The Superannuation Guarantee (SG)
The Superannuation Guarantee (SG) is a compulsory contribution that employers must make on behalf of their employees (this is what was eluded to in the previous paragraph). As of 1 July 2024, the SG rate is 11.5% of an employee’s ordinary time earnings, and this rate is expected to gradually increase over the coming years. These SG contributions are made to ensure that Australians have sufficient savings for their retirement and don’t have to rely solely on a Services Australia aged pension. If you would like an explanation of ordinary time earnings or anything in this article, please reach out to your accountant Melbourne.
Choosing a Super Fund
Employees generally have the option to choose their own super fund. If they don’t select a fund, their employer will pay their contributions into a “default” fund. Super funds come in many forms, including retail funds (e.g. Australian Super), industry funds (e.g. CBUS), public sector funds, and self-managed super funds (SMSFs). An SMSF is a super fund that you manage yourself. Each fund offers different benefits, fees, and investment options. Best to speak with your accountant Melbourne for guidance.
Tips for Choosing a Super Fund:
- Look at the fees charged by the super fund, as these can affect your long-term savings. Contact Nobel Thomas for a further explanation of this point.
- Consider the investment options that they provide. For example, if you would like to use your super money to purchase a property, then an SMSF maybe the best option.
- Check the personal insurance options provided by the fund, such as life insurance. Insurance purchased through a super fund can offer some tax benefits.
Types of Contributions
There are multiple ways to contribute into super, which can help you maximize your retirement savings. Please note that if you have any questions about any of the types of contributions, you can always reach out to your business accountant. The types of contributions are as follows:
- Employer Contributions: As discussed earlier, these are compulsory contributions paid by your employer as part of the SG.
- Voluntary (Personal) Contributions: Individuals can make additional contributions from their after-tax income or before-tax income (if earning investment or business income).
- Salary Sacrifice: Salary sacrifice contributions allow individuals to contribute pre-tax income into their super. This has the added benefit of reducing your income and your income tax for the year. Again, please contact your accountant Melbourne for a further explanation.
- Government Co-Contribution: For low and middle-income earners, the government may add up to $500 in co-contributions for voluntary contributions. This means that if you contribute $500 into super, the Federal government can match the amount and pay this money into your super fund. It is a mechanism to encourage you to save for your retirement.
- Spouse Contributions: A spouse may contribute to their partner’s super provided that partner is earning less than $40,000 (subject to change). The spouse may also be eligible for a tax offset for these contributions.
Accessing Your Superannuation
Superannuation is designed to be a long-term investment, meaning you typically cannot access it until you reach your “preservation age,” which ranges from 55 to 60 years old, depending on your birth date. Once you reach this preservation age, you can access your super if you retire or begin a transition-to-retirement pension if you’re still working.
In summary, you can access your superannuation under the following grounds:
- Reaching preservation age and retiring.
- Turning 65 years old (even if you are still working).
- Severe financial hardship or compassionate grounds.
How Superannuation Is Taxed
Australia’s superannuation system provides tax concessions to encourage saving. These can often be tricky to understand so you can reach out to your accountant Melbourne if you have any questions. Here’s a quick overview of those concessions:
- Concessional (Pre-Tax) Contributions: These include employer contributions and any salary-sacrificed amounts (i.e. referring to types of contributions above, this includes 1, 2 if before tax and 3). These contributions are taxed at a tax rate of 15% within the super fund. As an example, if your employer contributes, say, $10,000 into your super fund, your super fund will pay $1,500 of this money to the government in tax, leaving $8,500 to be invested.
- Non-Concessional (After-Tax) Contributions: These are contributions made from after-tax income, which have a tax rate of 0% (i.e. referring to types of contributions above, this includes 2 if after tax, 4 and 5).
- Investment Earnings: Let’s illustrate investment earnings with an example. Money in super is invested, for example, placed into a term deposit. The income earned on the investment, in this case earning interest on the term deposit, is called investment earnings. Investment earnings within super are also taxed at a concessional rate of 15%. So, continuing the example above, suppose the remaining $8,500 is invested into a term deposit earning an interest rate of 5%. This means that $425 ($8,500 x 5%) will be the earnings. 15% of the $425 will be paid to the government in tax, meaning that $63.75 will be paid in tax ($425 x 15%).
- Withdrawals: If you’re aged 60 or over, most withdrawals of super money are tax-free.
Why Superannuation Matters
Understanding superannuation is crucial for Australians of all ages. By keeping an eye on your super fund’s fees, investment performance, and contribution strategy, you can set yourself up for a comfortable retirement. Don’t hesitate to seek advice from your business accountant if you’re unsure how to make the most of your super.
