It’s a worry that’s on everybody’s mind: “How will I get on in my golden years?”
Fortunately, for residents of Australia, the superannuation programme handles those retirement concerns. Employees can rest assured that they can live life comfortably after their working years.
But what are the tax implications of our super contributions? These are things that need to be taken into account when living on a fixed income during retirement.
The goal of this article is to teach you everything you need to know about the superannuation programme in Australia. We’ll even cover how to handle Islamic super and Halal super procedures.
We’ll cover all of the key points surrounding the programme, and by the end, you’ll be able to rest easy knowing that you are cared for during your retirement.
What Is Superannuation
Superannuation is an organised pension programme put in place by an employer for the benefit of its employees. In the States, these are known as deferred compensation or defined contribution plans.
The term superannuation is typically used regarding retirement planning in Australia.
Employees make weekly contributions out of their paycheck (usually automatically) to their super fund. These contributions are not taxed until they are withdrawn, or until the employee has reached retirement age.
Employees with this type of superannuation plan are typically less concerned with outliving their income during retirement than those who don’t have a super fund set aside.
So, how exactly does a super fund work? Well, we’re glad you asked.
As an employee contributes money to their super fund throughout their career, this money is put into various investment vehicles. Employees usually have the opportunity to select how their money is invested when they initially sign up for the plan.
Some funds are more aggressive, while others are more conservative. Employees can also choose something known as a “target date” fund.
Target date funds are designed with the end in mind. They are targeted toward the employee’s specific retirement year, and that employee’s money is invested accordingly.
Target funds will typically start more aggressive, early on in an employee’s career, and gradually grow more conservative as an employee gets older and nears retirement.
However, there is one main difference between superannuation funds and other investment vehicles. The money available to an employee through their super fund relies solely on a schedule, and not the performance of the investment vehicle.
Employer vs. Employee
Let’s explore how super funds look from both the employee and employer perspectives.
As mentioned earlier, the superannuation fund is not dependant upon market performance. This is great news for the employee because they know they are getting a pre-defined benefit, no matter what, upon retirement.
Certain variables affect the employee’s benefit. How much they are paid out of their fund will depend on the age at which they start withdrawing, their salary, and how many years they’ve been employed with the company.
The dependability of these plans makes them a favourite among employees. From the employer’s perspective, however, they can be a challenge.
Offering these plans to employees can be complex and more costly than other benefit plan options. The super fund benefits are calculated based on a pre-existing formula.
An employee will then receive that calculated amount of benefit upon retirement. Benefits are usually paid out monthly. Superannuation benefits are similar to Social Security benefits in this regard.
If an employee is set to receive superannuation benefits they need to be mindful of any other retirement or investment vehicles they may have in their portfolio. It may make sense to talk to a financial advisor to see how these plans coincide with your super benefits.
It’s also wise to have someone review your retirement vehicles to ensure you access them with the least tax liability possible.
Comparing to Other Plans
Once an employee qualifies for retirement and super fund benefits, they will start to receive their benefits. The same amount, as calculated by the formula mentioned above, monthly.
Other traditional investment vehicles don’t work in this way. For example, if you look at 401k or other employee contribution plans, they hold a portfolio of securities that are invested in the market. This leaves these traditional retirement vehicles open to the positive and negative fluctuations of the market.
This structure of traditional retirement plans makes them less reliable than superannuation plans. If the portfolio within your 401k performs negatively, you may run the risk of outliving your retirement benefits. This is less likely to happen to an individual on a defined compensation plan like superannuation.
Although the benefit amount of a super fund plan is fixed, the money in the fund is still invested. A trustee will manage the super fund and invest it accordingly into various securities. This is where superannuation plans are similar to 401k and other traditional retirement vehicles.
This is important to mention because we don’t want you to think that a superannuation plan is entirely risk-free. It’s not. There is still some risk that your portfolio could perform poorly during a market downturn.
If that were to happen, your plan could eventually become underfunded. This means that your super fund may get to a point where you don’t have enough benefit to live out your retirement years.
When it comes to super funds in Australia, companies are required to report the funding status of their plans (whether a plan is properly funded or underfunded). If your plan is in underfunded status, your company may be required to supply additional funds to bring the account into good standing.
Managing Your Super
For most people, their super fund starts when they get their first job. At this time, your employer will start to put away a portion of your wage or salary into your superannuation plan.
This is the time when you need to make important decisions about your future retirement. When setting up your super in Australia, you have two options. You can either have someone manage your super fund for you, or you can opt for a self-managed super fund (SMSF).
If you choose to have someone manage your super for you, it will be invested into a wide variety of different securities. These can include property, shares, and managed investment funds.
Your super may even offer types of insurance, like income protection.
If you started your super at your first job, and then switch employers, you’ll have to decide on what to do with your super fund.
When you begin employment with that new employer, you will again be allowed to select a super plan. As time goes on, you may start to amass a collection of super funds from different employers.
This is why we mention that it is good to periodically review your super. If you are, let’s say, ten to fifteen years into your working life and have multiple super plans, it may be a good idea to combine them.
This will help you to stay more organised, keep track of your super, and it will help you cut down on management costs and fees.
Tracking Your Super
If you decide that you are happy with your current superannuation plan, that is great news. But this doesn’t mean you should leave it alone and not pay any attention to it.
In fact, there may even be instances where you are having super held for you by employers and you are unaware of it. For that reason, among others, it is always a good practise to periodically track your super. Even if you are happy with its current structure and fees.
To track your super in Australia, you can visit the ATO’s online portal through their myGov platform. By logging in here you can view the different super funds being held for you, check if the government is holding any super for you, and consolidate unnecessary super funds into one account.
Boosting Your Super
If you so choose, you can add additional funding to your super account on top of the salary or wage being contributed by your employer. This is a great way to boost the funding in your account and make sure you have the money needed for the lifestyle you want in retirement.
There are multiple ways to do this. Some of the most popular are setting up salary sacrifice contributions with your employer. These are helpful because they not only grow your super account but will also reduce your taxable income as well.
Another popular way to boost your super fund is to make personal additional contributions. The benefit of this strategy is that doing so may also qualify you for an additional $500 contribution from the Australian government.
Accessing Your Funds
It’s important to note that it is illegal to withdraw money from your superannuation fund early. Most people aren’t given access to their money until they reach retirement, or meet one of the other conditions required for accessing their plan.
Watch out for scammers and fake promoters who claim that they can get you early access to your super fund. They may use this as a ruse to get personal information from you in an attempt to steal your identity.
There are circumstances when it is okay to access your super early. These conditions are outlined on the ATO website.
A Super Life on Your Terms
If you start early and plan right, your super fund will be your best friend. It will provide you the income to live the life you desire during your golden years.
Early planning, and a little upkeep, will keep your super fund up and running for years to come.
If you would like to talk to an advisor about how to start your super, managing your super, or any other retirement-related questions, Crescent Wealth is here to help. We can also advise on how to handle Islamic super and Halal super concerns.
Give us a call, visit us on our website, or browse the superannuation resources provided in our blog. We are here to help you plan for your future and live the life you desire in retirement.
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