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Most Aussies have a superannuation account (often referred as super), but not everyone knows what exactly superannuation is, and what the benefits are. Super is a legislated retirement savings system which plays a pivotal role in helping everyday Aussies secure their financial future. In this article, we will explore what superannuation is, along with its benefits and considerations for individuals in Australia.
Understanding Superannuation
Superannuation is a long-term savings plan designed to provide financial support to individuals in their retirement. It is a mandatory system in Australia, where most employers contribute a percentage of an employee’s earnings into their superannuation fund. Additionally, individuals can make voluntary contributions to boost their superannuation savings.
There are rules around what it can be used for and when it can be accessed. Your superannuation has a ‘Sole purpose’ of providing benefits for your own retirement, and as such cannot be accessed until you meet a condition of release. The most common way to access super is to retire after the age of 60, or turn age 65 if still working.
Types of superannuation accounts:
There are two main types of superannuation accounts which generally reflect your life stage. The first is an accumulation account which is designed to accumulate earnings whilst still working. It can accept contributions, and the main goal of this type of account is to grow the balance over the long term.
The second main type of account is an account based pension. This type of superannuation account is designed to fund retirement income. This is paid as a regular income to you and is similar to a pension, but paid from your own resources. You are unable to contribute further to this account and it requires a minimum amount withdrawn each year to the owner.
Benefits of Superannuation in Australia
Compulsory Employer Contributions:
Employers in Australia are required to contribute a percentage of their employees’ earnings into a super fund. This contribution, known as the Superannuation Guarantee (SG), helps individuals build a substantial retirement nest egg over the course of their working lives. As of the financial year 2023-24 it is at 11% of your ordinary time earnings.
Tax Advantaged Investments in Superannuation:
To encourage saving for your retirement, superannuation has favourable tax treatment. The government incentivises investing in superannuation for your retirement through having lower tax rates. Contributions made by employers and individuals are generally taxed at a concessional rate, and investment earnings within the superannuation fund are also taxed at a lower rate compared to the average Aussie. The tax rate within an accumulation style account is at 15% for most people, and an account based pension is at 0%.
Government Support to Build Retirement Savings:
The Australian government provides additional support to help Australians build their retirement savings. There are a variety of initiatives such as the co-contribution scheme, where low and middle-income earners may receive government contributions based on their personal contributions.
Investment Options:
Superannuation funds offer a range of investment options, allowing individuals to tailor their investment strategy based on factors such as risk tolerance, financial goals, and timeline to retirement. Depending on your type of super fund and provided you meet the SIS Act 1993, you can generally invest in anything you can invest in personally.
Insurance Cover:
Many super funds can help to provide automatic life insurance cover. This can help to provide cover to those that may be unable to access it. Please consider your super fund’s Product Disclosure Statement for further information.
In addition, you can use superannuation to fund Life insurance, TPD insurance and Income Protection. This can assist in being covered if your personal cashflow cannot support it.
Considerations of Superannuation in Australia
Access:
One of the main disadvantages of super is that you cannot access it until you meet a condition of release. The common ones are:
- Retirement after preservation age (generally 60)
- Reaching age 65
- Permanent incapacity or terminal illness.
If you are unsure if you meet a condition of release, it is important to speak with your superannuation fund, or your financial adviser.
Contribution Limits:
Due to the beneficial taxation, the government wants to limit how much you can contribute. There are a variety of contribution limits on what you can contribute and how you contribute. The two main limits for the 2023-24 financial year is $27,500.00 concessional contributions and $110,000.00 non-concessional contributions.
Legislation change:
As the superannuation asset pool gets larger, many governments view this as a way to generate revenue or make changes for other reasons. Commonly superannuation law is changed on each budget with recent changes being to make it less tax effective, i.e. to generate more tax revenue for the government. Another risk is that your access age is increased which may limit the accessibility of superannuation.
Importance of being Super conscious:
Since the introduction of super, it has helped many Aussies to save and better their quality of life in retirement. However, super regulations and policies have changed often, and will continue to change. Staying informed about updates and potential changes can help to ensure that your plan for retirement is still appropriate.
Understanding the benefits and considerations associated with superannuation empowers you to make informed decisions, ultimately paving the way for a financially secure and comfortable retirement. As with any financial plan, seeking advice from a financial adviser can ensure you have an appropriate strategy for your superannuation and retirement planning goals.
If you want to discuss any Centrelink strategies, including maximising entitlements, or what your Age Pension will change to, contact MLS Financial today through our online contact form.
Disclosures:
- This information has been compiled from sources considered to be reliable, but is not guaranteed.
