Understanding the basics of Australian superannuation
At a young age, most people don’t think about retirement. Since it is inevitable, the Australian government has set up superannuation to cater for such scenarios.
Superannuation in Australia usually involves numerous jargons that make it harder for many people to understand. In spite of that, if you hope to live a comfortable life after retirement, then, you need to learn and understand more about superannuation (super).
For that matter, we shall discuss the basics of the topic to remove any complexities that many seem to encounter.
What is superannuation?
Most Australians agree that superannuation is a reliable way that individual can save and secure the future. Superannuation is actually a kind of tax effective manner one can save for retirement. Access to this kind of fund is generally permitted when you retire.
Actually, your employer has the responsibility to make contributions into your super fund using the Superannuation Guarantee (SG). If you wish to do something, you can top up the super using your own money, and in case you are a low-income earner, the government can make contributions for you. Similar to other managed fund, your money is taken and pooled with those of other members, and later professional investment managers come in to channel some to investments.
How to choose a super fund
A lot of people prefer to choose the super fund they want to make super contributions. But, before you make your selections, ensure your employer permits you to make such a choice.
There are cases where you may possess little or no choice of the super funds — especially when some industrial awards specify a particular fund or a select few funds that one should contribute earnings.
In case you desire to choose your super fund, get a standard choice form from your employer or Australian Taxation Office (ATO), then, fill it to inform the employer about your choice. An employer will have to place your money to a ‘default’ super fund, referred as a MySuper account, if you fail to choose your super fund.
How money is paid into super
There are three kinds of super contributions:
If you are in employment, your employer must pay an amount that equals to 9.5% of your regular salary or wage into your super fund. Such a payment is an extra payment beyond the normal earnings. Employer contribution to the super funds is also referred to as super guarantee contribution (SGC). Most employees around choose a super fund from the many different types available, for the employers to make payments. In case you are unable to choose a fund for yourself, your employer is prompted to choose a default fund for you known as a MySuper account. But, you have the freedom to change this status any time you wish after getting your preferred account — you will just let your employer know your new account details.
Employer contributions are usually based on your ‘ordinary time earnings’ which you earn after working for ordinary hours, including bonuses, allowances, certain paid leave, commissions, and over-award payments.
Personal super contributions
As an individual you can also make extra contributions in the following ways:
- Forgo portion of salary: As an employee, you can choose to direct a portion of your pre-tax income into the contribution. Your employer has the duty to deduct the amount and send it together with your contribution to the fund.
- After-tax pay: Once the payment of tax is made, you can request your employer to make a personal contribution on your behalf. The government can aid low-income earners with co-contribution.
- Bank transfer: Using direct deposit or BPay, you can choose to transfer a portion of your saving into a super account.
- Super transfer: There is also an option to transfer some or all your super into your main super fund account.
Government bonus contribution
Depending on the amount of money you earn, you might receive a government co-contribution — this occurs after putting after-tax into super. Specifically, after you making personal after-tax contributions, low-income earners are eligible to get up to an extra $500.
For those who earn up to $ 37,000, the government might decide to give you a ‘low-income super tax offset’ of up to $500. No extra money is needed to be put on the super for one to be eligible for this kind of payment.
What happens to your super money?
Super funds have a variety of investment options to invest super fund account money. Such options usually entail single sector options like cash, shares and property and pre-mixed options that include a mix of different asset classes.
Choose an appropriate investment option according to your investment timeframe and market fluctuations tolerance since your investment returns will influence the rate your super grows. In case you possess several super funds, it is advisable to consolidate them to make tracking more manageable, and even save some fees.
After you retire, you can decide to take your super as a regular income stream, lump sum or a combination of both options. In case you settle for the retirement the income stream option, you will definitely continue earning interest from the money that remains in your super.
How to look after your super
- Combine multiple funds
The consolidating process of super funds is merely easy. Just any of your preferred super for them to make transfers for you but if you own a MyGov account, you can use it. Before consolidating funds, ensure you’ve recovered lost super, and you’re not in a position to lose any benefits like insurance as it can’t be replaced once the fund is chosen.
2. Choose an investment option
After settling for a particular fund, you can go ahead and select the way your money is invested. When it comes to selecting the desired investment options, it is crucial to choose the suitable risk level and investment time frame.
You can accept a higher risk level if you desire to have high returns and find your retirement is still a long way to come. If you tend to cautious or your retirement time seems near, professionals advise you to choose a more conservative option to protect your capital.
3. Sort out your insurance
You will automatically be given a basic insurance level entailing life, total and permanent disability and income protection with Most MySuper accounts. Consider the suitable level of cover and adjust it according to your requirements.
Withdrawal for this kind of fund only occurs when one reaches preservation age and retires. However, in case you are experiencing severe financial hardship, you can request the Australian Taxation Office to give you an early release of superannuation — this occurs under very limited circumstances.
Upon retirement, you can choose to roll over your super into an income stream, take it as a lump sum or do a combination of both options. Most people usually prefer taking the income stream option; as it enables them to get some kind of regular income similar to the way they used to when in employment. After getting your super payments, you can decide to supplement it with extra income from other sources to cater to your needs.
The preservation age usually ranges between 55 to 60 depending on when a person was born.
The above article is information only and mot advice.