WE KNOW SUPER CAN BE COMPLICATED…

Superannuation is a long-term savings program introduced by the Government primarily to provide income to individuals in their retirement.

In Australia, superannuation investments receive special tax concessions that aren’t available to other types of investments. That’s why super is such a powerful vehicle to save for retirement.

As your super is likely to be one of your biggest assets in retirement, the choices you make today can have significant impact on your lifestyle in your retirement.

Since the federal government introduced choice of superannuation fund legislation on 1 July 2005, you have even more options about where your super can be paid.

The federal government introduced choice of superannuation fund legislation on 1 July 2005. The key benefit of this choice of fund legislation is that you will have more control over where your contributions are paid. So even if you change jobs, you can continue to keep the one super account for life, just like your normal bank account.

Choice of fund is not available to everyone. Your employer will be able to confirm whether choice of fund applies to you.

From 1 July 1992, the federal government introduced the superannuation guarantee (SG) scheme. This scheme requires employers to make contributions to a complying superannuation fund for their employees. Since 1 July 2002, the SG percentage has been set at 9% and most employers are required to use ordinary times earnings (OTE) as the basis for calculating SG contributions.

A PDS is a legal document that describes the features of a financial or investment product, as well as a summary of the major benefits, potential risks and the costs associated with that product.

A rollover (or consolidation of your accounts), involves moving your super savings from one fund to another. Consolidating your accounts can reduce the amount of fees you pay – especially if you have multiple accounts open.

For most people, the tax effective nature of super as an investment vehicle is the biggest benefit from investing in super. Super is concessionally taxed at three levels:

• Contributions to super are generally taxed at 15% in contrast to marginal tax rates, which can be up to 45% (plus 1.5% Medicare levy)
• Earnings on super investments are taxed at a maximum of 15% in contrast to other ordinary investments which are typically taxed at your marginal tax rate.
• Payments from super are tax free after the age of 60.

Note that non-super investments are not entitled to this tax treatment.

Most super savings are preserved, which means you generally can’t withdraw your money until you meet a condition of release. The main conditions of release include:

• retirement (reaching your preservation age and permanently retiring from the workforce)
• reaching age 60 and leaving your employer
• reaching age 65 (regardless of work status)
• permanent incapacity, due to physical or mental ill-health
• severe financial hardship
• compassionate grounds.

If you reach your preservation age but have not yet retired, you can access your super as a regular income through a transition-to-retirement strategy.

These conditions of release also apply to your restricted non-preserved benefits.

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'Your preservation age is the age at which you can access your preserved super benefits, provided you have permanently retired from the workforce or start a transition to retirement pension. It is based on your date of birth:

Accumulation is a term used to describe the stage of life where you are contributing money to your super. In contrast, decumulation is the stage at which you start drawing money from your super so you can receive an income. This is often after you reach age 55 and have set up a pension account.

A defined contribution fund is a fund where you and your employer make regular contributions which accumulate and, when invested, generate earnings. The reason it’s called ‘defined contribution’ is because the contributions from your employer are generally specifically defined (e.g. 9% of salary per year). The super benefit you receive is the total of all the contributions into your account plus investment earnings (which can either be positive or negative), minus expenses and taxes.

A defined benefit fund is a fund where your paid benefits are defined in advance of your retirement. The benefit is normally expressed as a proportion of your salary on retirement. It’s normally your company or sponsor of the fund (as opposed to you as the member) which carries the risk associated with the fund’s ability to meet its liabilities. There has been a move away from defined benefit to defined contribution funds.

There are generally four types of contributions that can be made to your super:

• Personal: Made by you – either before-tax or after-tax
• Employer: Made by your employer – as SG contributions, salary sacrifice contributions
• Spouse: Made by a person on behalf of an eligible spouse
• Government co-contribution: Made by the federal government for low and middle-income earners.

Salary sacrifice is an arrangement between an employer and employee where the employee agrees to forego part of their future salary or wages. In return the employer provides benefits of a similar value, such as superannuation. Also known as a before-tax member contribution.

Spouse contributions are contributions made by a person on behalf of an eligible spouse. To be eligible to receive spouse contributions, the receiving spouse must be aged under 65 or, if aged 65-69, be gainfully employed at least 40 hours in a consecutive 30-day period.

To be eligible to make spouse contributions, the contributing spouse must be a ‘taxpayer’ and must not otherwise be entitled to a tax deduction for the contributions. The contributing spouse can be any age and does not have to meet an employment test.

The government co-contribution is a federal government funded contribution made directly to super funds for low-income and middle-income earners. To qualify, a person needs to make a personal contribution to a super fund. The maximum co-contribution a person can receive is $1,000 and this reduces as a person’s income increases.

From 1 January 2006, couples have been able to transfer a portion of their previous year’s super contribution to their spouse’s super account. Only concessional (before- tax) contributions can be split. The amount that can be split is the lesser of 85% of taxable contributions and the concessional contribution limit. From 18 July 2006, couples are also able to split up to 100% of their untaxed employer contributions.

Employer termination payments, small business capital gains tax rollover amounts and rollovers and transfers from other funds cannot be split.

Average weekly ordinary time earnings (AWOTE), is a measure of wage and salary levels of employees in Australia, as measured by the Australian Bureau of Statistics. It is published monthly and the change in AWOTE is often used as an index for increasing certain thresholds each year.

Ordinary time earnings (OTE), is the amount an employee earns for their ordinary hours of work. In general, OTE excludes any overtime paid. It is used as a default earnings base for calculating an employer’s SG contributions.

Contributions tax, applies to concessional (before tax) contributions, (i.e. employer contributions to super and personal contributions to super for which a tax deduction is claimed).

An eligible rollover fund is a super fund that can receive benefits which are automatically rolled over from other super funds. They are designed for accepting unclaimed benefits from other super funds for members who are under 65.

A managed fund is a diversified, professionally managed portfolio of securities that pools the assets of individuals and organisations. A fund is usually established with an investment objective such as generating income or long-term growth.

A unit price is equal to the value of the underlying assets of an investment option divided by the number of units issued. Unit prices move up and down each day in line with the movement in the value of the underlying assets. As such, investment earnings (positive or negative) are reflected in the movement of unit prices.