Superannuation provides a tool for saving for retirement. Both yourself and your employer can contribute to it over time and this money is then invested into a variety of appropriate investments such as shares, property, savings accounts and government bonds.
When you qualify for your superannuation either due to retirememnt, disability or death, you will receive the money (less charges and taxes) either as regular payments or as a lump sum payment, or a combination of the two.
The Superannuation Guarantee came into effect on July 1, 1992, making it compulsory for employers to contribute to an employee’s superannuation fund.
The minimum amount of the contribution is 9% of an employee’s wages. This does not include any overtime, leave loading and fringe benefits).
However, some employees are not covered by this “guarantee”. The Superannuation Guarantee Act states that it is not compulsory for employers to contribute to the Superannuation Guarantee under certain circumstances.
Some of these exceptions include:
• If an employee earns less than $450 per month;
• If an employee works 30 hours per week or less and is under the age of 18;
• If an employee is aged 70 or over;
• If an employee is paid to do domestic or private work for 30 hours per week or less.
Is your employer allowed to make additional contributions?
An employer is allowed to make higher contributions than the amount specified in the superannuation guarantee, but only as:
• a reward based on the performance of an employee;
• an employers contribution that increases in line with the employees voluntary contribution;
• a ‘salary-sacrifice’ - this is where the employer makes a contribution which tend to be benefits such that would otherwise be paid as salary.
By seeking advice from a financial advisor you can find out how to get your employer to pay more, but you have to remember that employers are limited by the amount that can be claimed as a deduction for superannuation contributions made.
These limits can change from year to year so check with your superannuation fund or the Australian Tax Office to be sure.
Should employees contribute too?
If you have more disposable income than you require, and feel you are in a position to save this money towards your future, it may be wise to consider making superannuation contributions as opposed to investing it elsewhere.
There are age limits that indicate whether you can contribute to superannuation – for more information on this, see the Australian Taxation Office web site.
Some of the advantages are:
• you generally pay less tax on interest accumulated from superannuation savings than you would on interest from a bank account, although it is worth looking into deals on savings accounts as interest rates can work out higher, thus providing better rewards in the long-run;
• the ’salary sacrifice’ scheme automatically takes the the superannuation contribution from your salary, which eliminates the possibility of you being tempted to spend the money on anything other than savings.
• There are limits involved to the amount that can be added to the salary sacrifice;
• the interest on superannuation savings is added onto the total investment, so effectively the interest earns more interest.
• The Australian Prudential Regulation Authority (APRA) estimates that a sum of money ‘compounded’ at 7% a year will double in value in ten years;
• you may wish to consider taking advantage of incentives offered by the Government, such as the co-contribution scheme. This scheme allows you to be given up to $1500 from the government when you contribute to your fund.
Check out the Australian Taxation Office website for more information.
tax advantages
• The maximum tax rate for contributions made by your employer is 15%.
• The income earned through the fund’s investments is also taxed at a maximum rate of 15%.
• Salary sacrifice contributions are taxed at 15%.
• When an employee hits 60 they can withdraw their superannuation as a one-off lump sum or as a tax free income stream.
laws
There are a number of laws involved around superannuation funds which include:
• Superannuation Industry Act and Regulations;
• Superannuation Guarantee Act and Regulations;
• Income Tax Assessment Act.
Jargon definitions
Accumulation funds – this is the money is invested and the final benefit depending on the overall contributions, plus earnings of the fund.
Annuity – This is much the same as a pension. You receive regular payments that are made periodically for either a specified amount of time or until you die.
Benefit - the amount paid to you out of the superannuation fund or kept on your behalf within the fund.
Contribution - the money paid into the superannuation fund by either yourself or your employer.
Lump sum – the entire fund received in a single one-off payment.
Preserved - money held on your behalf that you cannot access until you reach retirement or under certain other circumstances, such as reaching a certain age or leaving employment either temporarily or permanently. This includes money contributed by an employer, interest earned on the fund or contributions made by a self-employed person which have been claimed as a tax deduction and any contributions not deducted made after 1 July, 1999.
Rollover - moving money from one fund to another.
What you need to be aware of
You are entitled to certain information from your superannuation fund. This includes:
• a member statement showing the amount of your benefit at the beginning and end of the related period, the amount that is preserved and contact details;
• a fund report showing the fund’s financial status;
notification of changes that affect you;
• a statement that shows your benefit
