Introducing superannuation

Superannuation contributions fall into two categories:

1. Concessional

• Award contributions
• Superannuation Guarantee contributions
• Additional voluntary employer contributions
• Salary Sacrifice, subject to employer agreement - effectively an employer contribution
• Tax deductible contributions by self-employed and nonsupported persons

2. Non Concessional

• Personal after tax contributions made by anyone under age 65
• Personal after tax contributions made by eligible persons between the ages of 65 and 75 years subject to meeting a ‘work test’ (see below).
• Spouse contributions
• Co-contributions

The ‘work test’ for people 65 and over is being gainfully employed for at least 40 hours within a period of 30 consecutive days during the financial year in which the contribution is made. Monetary limits (caps) apply for these contributions. 

There are two types of funds used in Australia:

1. Accumulation Funds

Contributions less fees, taxes and insurance premiums (if applicable) are invested to provide a lump sum or deliver an income stream in retirement. It comprises accumulated contributions, insurance benefits (in some cases) and investment
earnings net of tax.

The value of the fund can be determined at any given time, relatively simply, by the member and therefore are termed Account Based funds. The member bears all the investment risk with the value of the fund rising or falling subject to investment options chosen and market conditions. Retirement Savings Accounts (RSA) provide a capital guarantee. They are similar to bank accounts investing in cash and/or fixed interest and do not fluctuate in value with market movements. From 1 July 2013 superannuation funds will provide default funds under the ‘MySuper’ initiative which aims to simplify default superannuation products and improve their transparency and comparability.

2. Defined Benefit Funds

Defined Benefit Funds are Non Account Based funds and are usually open only to employees of the fund provider. Several Government and Corporate superannuation funds are defined benefit funds but many are being replaced by accumulation funds.

The end benefit is determined by set criteria taking into account such variables as length of service, member contributions and salary level on retirement. The employer carries the risk of ensuring the promised benefit, based on regular actuarial reviews.

Superannuation funds or schemes are offered by a wide range of private and Government institutions such as:

• Public sector employers
• Private companies for their employees
• Industry superannuation funds
• Life insurance companies
• Friendly societies
• Independent fund managers
• Financial Institutions (RSA)
• Self Managed Superannuation Funds (SMSF)

Contributions to superannuation made on or after 1 July 1999 are preserved until a condition of release has been satisfied. You can access your super when you:

• reach your preservation age and retire
• reach your preservation age and choose to begin a transition to retirement income stream while you are still working
• reach age 60 and your employment arrangement ends
• are 65 years old (even if you have not retired).

You can also access super in some specific circumstances, including:

• compassionate grounds
• severe financial hardship
• disability
• terminal medical condition
• death.

Persons who have attained their preservation age and remain gainfully employed can commence a noncommutable income stream from their preserved superannuation benefit, subject to specified conditions. These are referred to as Transition to Retirement Pensions (TRP’s). 

A superannuation fund or RSA that meets the standards of the Superannuation Industry (Supervision) (SIS) Act 1993 and chooses to be regulated under that legislation is classed as a complying fund and receives concessional tax treatment.

Superannuation investments in the accumulation phase are exempt assets for Government Income Support (GIS) until the fund member reaches age pension or service pension age.

From 1 July 2009 income (salary) sacrificed into superannuation by people under age pension age is counted as assessable income for all GIS payments of the person or their partner, as applicable.

Superannuation investments receive taxation and GIS concessions.

Prior to 1 July 2013 accounts with balances less than $1,000 could not be eroded by fees. Following the introduction of ‘MySuper’ accounts this protection ceased. Consolidation of super accounts and use of MySuper or other low cost accounts should be considered particularly for disengaged or value conscious members.

Choice of investment options is important as superannuation providers may not guarantee the capital or earnings.

When approaching retirement the continued investment of a superannuation benefit should be planned. If the benefit is to be withdrawn in the near future, consolidation in an investment option with low volatility may be prudent to preserve retirement capital.

It is sensible not to hold all your capital in superannuation. Diversification over markets, products and time is also important.