Superannuation, or super as it is more commonly known, is a cornerstone of most people’s personal financial management. Apart from their own home, for many people superannuation comprises their entire personal wealth.
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Last updated: Dec 2023
Introduction
Superannuation, or ‘super’ as it is more often known, is a major element of most people’s personal financial management. Apart from their own home, for many people superannuation comprises much of their entire personal wealth. It is very important.
Super is basically a form of compulsory saving for employees and a form of tax-advantaged investment for all working people, whether they be employees, self-employed (including investors) or no longer working.
In this guide, we introduce the basics of superannuation: what super is for, how money ‘gets in’ to super, how it is managed when it gets there, how it can be used both while it is in the fund and when it is paid out. We also include some particular comments about women and super.
Please feel free to send a link for this e-book to any other person who would find it helpful. And, if you would like to discuss your own super situation, please do not hesitate to contact us.
What is super?
Super is a long term savings arrangement designed to assist individuals to accumulate wealth to enable them to fund (at least some of) their own retirement. Becoming self-sufficient like this reduces people’s reliance on government services such as the age pension.
Many countries use some form of superannuation. Australia’s current system of superannuation took form in 1983, when the then Hawke Labor government reached an ‘Accord’ with trade unions such that the unions agreed to forego direct pay increases in return for the introduction of compulsory super contributions for their members. Initially, employers were obliged to contribute an amount equal to 3% of their employees’ salary or wages into a super fund on that employees’ behalf. At a stroke, this meant that all affected workers (basically, union members) started to save 3% of their annual income in a savings vehicle which could not be accessed until retirement. All affected people had started compulsorily saving for the future.
The system was expanded in 1992 to cover all Australian employees. This system became known as the ‘Superannuation Guarantee’ and it is still in place today. The introduction of compulsory super came as demographic analysts realised that the Australian population was ageing and this would place a substantial strain on future social security benefits that would need to be paid by the Government, especially in the form of the old age pension.
Over the years since, there has been a huge increase in the amount saved into superannuation. According to the Association of Superannuation Funds of Australia (ASFA), As of the end of the June 2023 quarter, the total held in super was $3.5 trillion dollars.
Forced Saving for Retirement
Given that employers must make contributions on employees’ behalf, super is effectively forced saving. And given that superannuation benefits cannot generally be accessed until a person retires, super is effectively forced saving for retirement.
Saving for retirement is the predominant purpose of superannuation. Indeed, the law states that saving for retirement has to be the sole purpose of a fund if it is going to enjoy the tax concessions available for super. There is one other thing for which super is able to be used: superannuation also provides a way for people to finance life insurance during their pre-retirement years.
The Superannuation Guarantee system has had a positive effect – something that is often overlooked as super and its place in public policy is often politicised. But there is evidence to suggest that Australia is comparatively well-placed, in world terms, to cope with the ageing of its population (this ageing is also being experienced in other developed economies).
Put simply, Australia’s superannuation system is undoubtedly one of its economic strengths.
Chapter 1: Moving Money into Superannuation: Contributions
Money that is transferred into superannuation on behalf of a member is known as a ‘contribution.’ There are two types of contribution: ‘concessional’ and ‘non-concessional.’
Concessional Contributions
Concessional contributions, often known as ‘before tax’ contributions, are made using income that is not taxed in the hands of the person making the contribution. Contributions can be made by employers or individuals. Employers make contributions via the compulsory Superannuation Guarantee, now at 11% for all eligible employees, and via additional contributions over and above this, which may include salary sacrifice.
Individuals can usually also make a tax-deductible personal contribution into their super fund. These are known as ‘personal contributions.’ Once concessional contributions arrive in a fund, they are generally taxed at 15%. The fund pays this tax, and the member’s balance within the fund is reduced accordingly.
Tax on Concessional Contributions
As stated, concessional contributions are taxed at 15% in the hands of the superannuation fund. The fund pays this tax directly to the tax office.
For example, consider an employee earning $70,000 a year. Under the superannuation guarantee rules, her employer must make a contribution worth 11% of her salary into super, equating to $7,700. The employer pays this full amount directly into the employee’s super fund.
For superannuation contributions, the employer does not withhold tax. Instead, the employer pays the full amount of the contribution into the superannuation fund, and the superannuation fund pays tax to the government.
In this scenario, the employer must contribute $7,700 directly to the fund. Having received the money, the fund must then pay tax of 15% ($1,155), leaving $6,545 in the employee’s superannuation account.
High-Income Earners – Division 293 Tax
The ‘typical’ tax rate of 15% applies to contributions on behalf of people whose income is less than $250,000. Contributions on behalf of high-income earners who have an adjusted taxable income in excess of $250,000 per annum are taxed at a higher rate of 30%. This is known as ‘Division 293 tax.’
Salary Sacrifice
The superannuation guarantee rules oblige an employer to contribute an amount equal to 11% of an employee’s wages or salary into superannuation. The amount that can be salary sacrificed is limited to $27,500 less any amount being paid into super as a superannuation guarantee. A person who receives a superannuation guarantee contribution of $10,000, for example, can only sacrifice an additional $17,500 of income into superannuation.
Personal marginal income tax rates increase as income increases. For example, once a person’s taxable income has reached $45,000, their marginal income tax rate becomes 32.5%. This means they only get to keep $0.675 for each dollar that they earn above $45,000. Once taxable income goes over $120,000, the marginal tax rate increases to 37%, meaning people only get to keep $0.63 of every dollar they earn, etc. The full list of rates for the 2022-2023 tax year is as follows:
Income – Marginal tax rate
$0 – $18,200
0%
$18,201 – $45,000
19%
$45,001 – $120,000
32.5%
$120,001 – $180,000
37%
$180,001 and above
45%
As can be seen, the financial benefit of salary sacrifice increases as taxable income increases.
As discussed below, the total concessional contributions that a person can have in a given year is capped at $27,500. Therefore, the amount that can be salary sacrificed is limited to $27,500 less any amount being paid into super as a superannuation guarantee. A person who receives a superannuation guarantee contribution of $10,000, for example, can only sacrifice an additional $17,500 of income into superannuation.
Personal Contributions
Members of super funds can claim a tax deduction for contributions that they pay directly into a superannuation fund. Personal contributions can be made up to the age of 74, with a cap that personal contributions do not exceed $27,500 in a given year.
The Concessional Contributions Cap
The tax advantage for concessional contributions is a ‘limited offer.’ As of the 2023-2024 financial year, concessional contributions are subject to an annual cap of $27,500. This cap includes employer contributions under the Superannuation Guarantee (now 11%), salary sacrificed amounts, and any personal deductible contributions.
If contributions exceed this cap, the excess is added to your taxable income, and you’ll pay tax on them at your marginal rate. However, individuals with a total super balance of less than $500,000 have the option to carry forward unused portions of this cap for up to five years, potentially allowing for higher contributions in future years.
Contribution splitting
You may have heard the term ‘contribution splitting.’ A member is permitted to transfer (or ‘split’) certain contributions between themselves and their spouse. They do this by transferring the contributions they have made from their super account to their spouse’s account. This rule recognises that some spouses (generally female) have restricted work patterns compared to their partners. Women often take time off work to have children and raise their family, which prevents them from accumulating significant funds in their super account. This concession is designed to recognise and address this imbalance.
The rules allow for up to 85% of a concessional contribution (that is, the amount left after tax) made in the previous financial year to be transferred to the spouse’s account. The funds that are transferred to the spouse are treated as a ‘rollover’ and not as a contribution, which means they do not get taxed again in the hands of the recipient.
As the funds were initially a concessional contribution, the funds will be an entirely taxable component and form a part of the recipient spouse’s taxed element in their fund.
While splitting was first introduced to allow for a non or low-earning spouse to effectively be superannuated, it is often used for more pragmatic reasons. There is no rule that benefits need to flow in a particular way (for example, from the member with a higher balance to a member with a lower balance). So, one common strategy is for a younger partner to split his or her contributions to an older spouse. The benefit here is that the money will generally become available sooner by doing this (remember: super must remain in a fund until a condition of release is met. The most common condition of release is reaching the relevant age).
An alternative is to split contributions in such a way as to maximise Centrelink entitlements. This might mean deliberately minimising the super balance of one or the other spouse – usually the older spouse who is likely to seek Centrelink benefits sooner.
Non-concessional contributions
Non-concessional contributions are ‘after-tax’ contributions made into a superannuation fund. For the 2023-2024 financial year, the annual cap for non-concessional contributions is set at $110,000. Individuals under the age of 75 have the option to ‘bring forward’ up to three years’ worth of these contributions, allowing them to contribute up to $330,000 in a single year, provided this is within a three-year period.
After turning 75, members can still make non-concessional contributions up to 28 days after the end of the month in which they turn 75. Post this period, such contributions are no longer permitted.
Downsizer Contributions
As of 1 January 2023, individuals aged 55 and over who sell their family home can contribute up to $300,000 per person into their superannuation as a non-concessional contribution. This change is part of the expanded Downsizer Scheme, aimed at encouraging older Australians to downsize their homes and boost their retirement savings.
People taking up this offer (and there have not been many) will also ‘unlock’ equity from their family home to fund their retirement. Again, this is seen as good social policy, as wealth stored in the family home is hard to spend. The family home is also not counted for Centrelink purposes, meaning that many people who own expensive homes qualify for aged pension support.
This measure effectively allows older Australians to swap part of the tax-free investment that their house represents for a tax-free investment within their superannuation (given their age). The measure only benefits people in very limited circumstances, so we encourage you to contact us if you are contemplating downsizing the family home.
Chapter 2: Moving Money Between Superannuation Funds: Rollovers
A member of the superannuation fund is entitled to transfer his or her benefits from one fund to another. This is known as a ‘rollover.’ A rollover does not trigger a tax charge, as the money was either (i) taxed when it arrived in the original fund (concessional contributions and earnings on investments) or (ii) was not subject to tax (non-concessional contributions). (‘There is only one rare exception to funds being able to be rolled over with no tax consequences – when there is an ‘untaxed’ portion is held in the existing super fund. This does not occur often but it pays to check with your super fund that all money has been taxed before you perform a roll-over. We can assist you to do that).
Rolling over superannuation benefits has both advantages and disadvantages. Obviously, it should only be done where the advantages outweigh the disadvantages. We will examine the common advantages and disadvantages in the next two sections.
The advantages of rollovers
There are various advantages to be had by rolling superannuation benefits over from one fund to another. These advantages are discussed below.
Consolidation
One of the main reasons to roll benefits over from one fund to another is to consolidate benefits that are spread across a number of funds into just one or two funds.
Under the terms of the superannuation guarantee, employers must make superannuation contributions on behalf of eligible employees. Employers often have a preferred fund into which they pay contributions on behalf of their employees. This can often mean that people who change employers end up with benefits being held in more than one fund. (This can be particularly the case for older workers who have been working for longer, as there used to be less discretion for people as to where their employer paid their super).
Consolidating benefits into one fund can reduce the administrative burden of managing superannuation benefits. It can be easier to manage superannuation when all benefits are held in a single account.
As well as administrative ease, consolidating funds often reduces the overall level of fees paid by the member. Superannuation funds typically charge two types of fee: flat fees that are imposed regardless of the balance of member benefits within the fund; and variable fees that change according to the balance of member benefits within the fund.
Consolidating superannuation funds typically reduces the overall amount of ‘flat fees’ paid by a member. As the name suggests, flat fees are payable irrespective of the level of benefits within the fund. This means that two funds lead to two sets of flat fees, and so on, whereas one fund will only incur one set of flat fees, regardless of the balance within the fund.
For example, a person may have two superannuation funds and hold $20,000 of benefits in each of them. If they are paying a flat fee of $200 per year per fund, this is $400 in total, or 1% of their total benefits of $40,000. If they consolidate their benefits into one fund, and therefore only pay a single flat fee of $200 per year, then the total fee falls to 0.5% of their benefits.
Coverage of insurance policies available within the fund
As discussed below, superannuation funds often make life insurances available to their members. The availability of life insurance can be a significant factor in determining whether one fund is better than another. Therefore, rolling benefits over from one fund to a second fund with a superior insurance policy can make good sense.
It can be difficult to gauge the relative merits of different insurance policies. We encourage you to get advice before changing super funds in pursuit of better insurance.
Fees
As discussed above, super funds typically charge members a mix of ‘flat’ administrative fees and percentage-based management fees. Consolidating superannuation benefits into a single fund can minimise the flat administrative fees that are paid on the total benefits.
Additionally, rolling benefits from one fund to another can reduce the variable management fee that is paid if the ‘new’ fund charges lower fees than the ‘old’ one. Most super funds invest in the same or similar investment markets. Therefore, for a given allocation between growth and conservative assets, most super funds achieve similar investment results. Attaining a lower price for the management of these investments can make good sense.
Management fees are not the only fee that can vary between funds. Insurance fees can also differ between two or more funds. Therefore, it can be possible to obtain cheaper insurance by moving from one fund to another. However, we do urge some caution here: when comparing two or more policies, a lower premium is only a benefit if the policies are the same (or the cheaper one is better). When it comes to insurances, lower prices are not always better.
To understand this, think about what the insurer is doing: it is setting a premium at a level that it thinks will allow it to pay out all claims and still make a profit. If an insurer is setting lower premiums, then it is either (i) more efficient; (ii) prepared to accept a lower profit; or – very importantly – (iii) anticipating paying out fewer claims.
If an insurer is anticipating that it will pay fewer claims, this may indicate that its policy is more restrictive. If the relatively lower expected claims lead to lower prices, then the cheapest policy is not necessarily the best. This is especially the case if the policy is so restrictive that a client has a greater chance of having a claim refused.
Remember, if a claim is refused, it was a waste of money having the policy in the first place.
The risks of a rollover
Loss of ancillary benefits
The potential loss of ancillary benefits is the major risk when rolling over superannuation benefits.
Superannuation funds are supposed to be managed for the sole purpose of providing retirement benefits to the members of the fund. These retirement benefits are often referred to as the ‘core benefits’ of a fund.
That said, the super rules also allow a super fund to provide ‘ancillary benefits’ to its members. These ancillary benefits include risk insurances, especially death and TPD benefits.
As a result, many managed super funds provide risk insurance benefits to members. Historically, this was often done on a default basis, where all members who meet certain thresholds purchased stated levels of insurance, without having requested for this to happen. The premiums for these insurances were deducted from member balances. Because this was on a default setting, the member did not always know that the insurance existed – or that the premiums were being charged. Many managed funds are now asking members to ‘opt in’ to life insurance, rather than have it automatically arranged.
When a member rolls their superannuation benefits out of a given fund, they will lose access to any ancillary benefits being made available through the fund they are leaving. And when a member rolls their superannuation benefits into a given fund, they will typically gain access to any default ancillary benefits being made available to that fund.
The main risk of switching from one fund to another is that the new fund might not provide the same level of ancillary benefits as the one that is being closed. This may mean that the member loses some or all of their existing insurance cover. This raises the prospect of a client being uninsured in the event that they need to make a claim.
Basically, a decision to rollover super funds often becomes a decision to change insurance providers. Changing insurance providers can lead to a reduction or complete loss of insurance coverage. So, care needs to be exercised when changing super funds. In summary, make sure you talk to us before you rollover out of a super fund.
Chapter 3: Earning Money in Superannuation: Investments
Having received either concessional or non-concessional contributions, the super fund then combines the contributions held on behalf of all other members of the fund and invests them. These contributions are invested by the super fund for the benefit of the members. The investment returns derived from these contributions are then added to the account of each member and are available as benefits for the member when they become eligible to withdraw their money.
All super funds are managed by one or more ‘trustees.’ As the name suggests, these people manage the money within the super fund ‘on trust’ for the benefit of the members. In a managed superannuation fund, these trustees act much like a Board of Directors for a company (although there are some important technical differences). In a self managed superannuation fund, the members of the fund are also it’s trustees, meaning that the members look after their own retirement money.
Managed superannuation funds
The majority of superannuation benefits are held within what are known as ‘managed superannuation funds.’ These are large funds in which individual members have an account. Benefits of each of the members are pooled and used to purchase various investment assets.
Frequently, members of the fund have discretion as to how their benefits may be invested. At a simple level, members are typically able to exercise discretion as to the level of risk to which their superannuation benefits are exposed in the pursuit of investment returns.
Put very simply, managed superannuation funds generally invest in one of three types of asset: cash and cash equivalents; property (including property trusts and other managed property investments); and equities (generally shares, but also similar types of security). Cash and cash equivalents are considered to be lower risk investments, while property or share-based investments tend to be higher risk. In order to justify this higher-risk, these assets typically offer the opportunity for greater investment returns than can be achieved with cash or cash equivalent investments.
So, when a member of a fund exercises discretion for a particular investment profile (for example, high growth), the superannuation fund will direct that member’s benefits towards investments that meet that profile.
Managed superannuation funds tend to charge a fee for managing investments. This fee varies both between funds and within funds, depending on the type of investment being undertaken.
Self-Managed Superannuation Funds
In a self-managed superannuation fund, the fund must have a written investment strategy that it applies to the management of member benefits. The Australian Tax Office have produced a simple, breezy video explaining the investment strategy required for an SMSF:
The trustees then apply this strategy and make investments on behalf of the members.
Typically, members of a self managed super fund share a very similar investment profile such that a single investment strategy can be applied across all of the fund’s members. For example, a married couple managing their own superannuation fund will typically have the same investment profile. They will generally each need to make use of their money at the same stage of life as each other and this generally allows them to manage their separate superannuation benefits using a single strategy.
We have also published a comprehensive e-book about self managed superannuation. Check under the resources tab on our website.
Investment profiles and superannuation
The term ‘investment profile’ refers to the level of risk to which investment assets are to be exposed. At one end of the spectrum is what is known as a conservative investment strategy. If a conservative investment strategy is applied, investments such as cash and cash equivalents will typically be preferred over equities. At the other end of the spectrum is what is known as a high growth investment strategy. Under a high growth investment strategy, investments such as equities are typically preferred.
Put very generally, the preferred investment profile is most influenced by how soon an investor is going to need the money being invested. If money is needed in the short-term, a conservative investment profile is typically applied. If money is not needed until the very long term, then a high growth strategy generally makes more sense.
It is worth remembering that superannuation assets are different to other forms of assets that the person may have. The main difference is that assets held within superannuation are preserved until the member reaches preservation age. In addition, assets held within superannuation are intended to finance a retirement, which may last 20 years or more.
As a result, people frequently underestimate how long-term the investment strategy for their superannuation benefits should be. Generally speaking, people can tend to hold or convert their superannuation investments to a conservative strategy too soon.
In many ways, it makes sense to establish a specific preferred investment profile for superannuation assets that may well differ from the investment profile that applies to non-superannuation assets. Consider, for example, Julian. He is aged 30 and is saving to purchase a family home. Julian has $50,000 in personal savings and $20,000 in superannuation benefits. Because the $50,000 will soon be needed to buy a home, a conservative investment approach makes sense for this money.
Conversely, Julian cannot access his superannuation for at least another 25 years. Therefore, a conservative strategy makes no sense for the $20,000 held in superannuation. That money would more typically be invested in some form of high growth option.
In this way, the same person can have two or more investment profiles for different elements of their financial management. Retirement savings can be managed using a different investment profile than personal savings. It usually all comes down to when the member will need the money.
Chapter 4: Life Insurance through Superannuation
In addition to providing for a member’s retirement, benefits in super funds can be used to purchase certain types of life insurance (sometimes known more generally as ‘risk insurance’).
Many, if not all, managed super funds offer various forms of life insurance. Given the generally-tax advantaged nature of super, these forms of life insurance can often be cheaper to the member. What’s more, if the person wanting insurance is already a member of a particular fund, the new policy can be relatively easy to establish.
As a general proposition, premiums for total and permanent disability (TPD) cover and death cover are not deductible in the hands of individuals paying directly for these types of insurance. That is, if a person purchases these policies directly, rather than through their super fund, the person cannot offset that premium against their income when calculating their tax liability. However, if the policy is held by the person’s super fund the member effectively receives a tax benefit. This is because the contributions that were paid into the fund to finance the insurance premiums are taxed at just 15%.
Let’s look at an example: Wendy has a marginal tax rate of 32.5%. She has to pay an insurance premium of $1,000 to get the required level of life and TPD cover. If she pays this premium directly to the insurer, she does not get a tax deduction. This means she must first earn $1,480 in order to afford the premium. Of this $1,480, she pays 32.5% in tax – or $480. This leaves her with $1,000 to pay the premium.
If Wendy pays this premium via a super fund, she only needs to earn $1,170 pre-tax. If she contributes $1,170 into her super fund, the fund will pay $170 of this to the tax office as tax ($170 is 15% of $1,170). Her super fund is then left with $1,000, with which it purchases the insurance policy.
From Wendy’s point of view, she has had to earn $310 less in order to purchase the insurance ($1,480 minus $1,170 equals $310). Pre-tax, the insurance is $310 cheaper when bought through super.
This tax effectiveness is not the only benefit of using superannuation to finance life insurance. As we outlined above, superannuation is effectively a form of forced saving for one’s retirement. This means that money held within superannuation cannot be withdrawn until a person reaches retirement age. People who need life insurance are typically younger than retirement age. For example, parents with financially dependant young children typically need life insurance. And parents of young children are typically well below retirement age.
Because money held within superannuation is not available to pre-retirees anyway, using superannuation benefits to purchase life insurance means that the individual does not have to use their current disposable income to make the purchase. This can be very advantageous, because the need for life insurance typically arises at the same time as there are many claims on a person’s disposable income. Again, the most common example is a parent of dependent children. Dependent children are expensive, which can make it very difficult for a parent to forego day-to-day spending money in order to purchase life insurance.
What a paradox: the very reason you need life insurance makes life insurance more difficult to afford! Put another way: the easier it is to afford life insurance, the less life insurance you need.
Of course, if superannuation benefits are used to purchase life insurance, then there will be fewer benefits remaining when the person eventually retires. If you spend some of your super, then you will be left with less super.
If a person wishes to restore their superannuation balance, then this can be a simple matter of either increasing the level of contribution in the current or future years, or deferring retirement for a period of time and using the extra time in the workforce to facilitate increased contributions into super. Deferring retirement also has the advantage of shortening the period of time over which superannuation benefits need to be spent.
Sometimes people argue that using superannuation to purchase life insurance reduces the amount available for retirement. This is not actually true. If the tax treatment means you spend fewer dollars when you buy your life insurance through super, you will be better off financially. The amount by which you are ‘better off’ is equal to the tax benefit that you receive. The point is that the total amount available for retirement – which includes personal savings as well as superannuation benefits – is higher than it would be if premiums were not paid via super.
Of course – whether you actually save the money made available is what will actually dictate how much money you have to retire!
Using super to purchase income protection insurance
While it makes sense to use super to purchase death cover and TPD, it can make less sense to use super to purchase income protection insurance. There are a few reasons for this. Firstly, premiums for income protection insurance are typically deductible in the hands of the person being insured. This means that if the insured person’s marginal tax rate is greater than 15%, then the tax deductibility for their insurances will be greater if they take out the insurance in their own name. A higher tax deduction means a lower effective cost for the insurance.
If we return to the example of Wendy, let’s imagine that she’s going to pay $1,000 per year to purchase an income protection policy. If she purchases the policy through her superannuation fund, that fund will need to pay $1,000. The fund then gets a tax refund of 15%, or $150, meaning her balance has fallen by $850.
Wendy’s personal marginal income tax rate is 32.5%. If she pays $1,000 directly to the insurer, she can claim a tax deduction equal to 32.5% of $1,000. She receives $325 back from the tax office, meaning that her insurance has only cost her $675 in after-tax terms.
But tax-deductibility is not the only reason that paying for income protection insurance within super can be a bad idea. When a super fund owns an insurance policy, any payments made under the policy are actually paid into the superannuation fund. In order for the member of the fund to receive the benefits, the super fund needs to be allowed to release the money to that member. In the case of a death or a total and permanent disability, the rules for the release of superannuation benefits are typically met (although there can be a little bit of a grey area when it comes to total and permanent disability). But when it comes to income protection, it is quite possible that the preservation rules within superannuation (the rules that prevent people removing money until they retire) will prevent a member from accessing the insurance payment. This is illustrated in the following story.
You may have come across this heart-breaking (and very frustrating) story. The story involves a father whose one year old daughter needs a liver transplant. Being so young, the liver does not need to be very big and, thanks to the wonder of our age, she is able to make use of a small piece of her father’s liver.
Unsurprisingly, Dad is more than happy to oblige. But having part of your liver removed is not a small procedure, and he needs to take three months off work. He has an income protection policy which should kick in after 30 days, and he was anticipating receiving a payment of 75% of his income for the second and third months that he is off work.
But there is a hitch. His income protection is held through super, which means that the insurance is paid to the super fund. Any subsequent payment from the fund to the father constitutes a withdrawal of benefits from the super fund. And the fine print for his fund says that he cannot access such funds in cases of ‘elective surgery.’
Which, in strict legal terms, this surgery is. The strict, narrow interpretation of elective surgery is surgery that will not save your life. In this case, there would be no harm to the Dad if he did not have the surgery. The transplant will save his daughter’s life, not his.
This is, of course, poor form from the institutions concerned. Few people would see anything ‘elective’ about surgery that saves a child’s life. But it also underscores the importance of having your risk insurances properly organised. Super can be a good source of finance for some forms of risk insurance, but not for all of them. It is for precisely this reason that it is important to speak to an adviser before proceeding with risk insurances.
Chapter 5: Getting the money out: withdrawals and pensions
The overall purpose of a super fund is to accumulate, manage and grow assets on behalf of the member, to eventually provide benefits once the member meets a ‘condition of release.’ As the name suggests, a condition of release is something that must happen before a superannuation fund is allowed to pay benefits out (release) to a member or a member’s beneficiary.
The conditions of release are:
The member has reached the age of 65;
The member has reached their ‘preservation age’ and retires;
The member has reached their preservation age and begins a transition to retirement income stream;
The member ceases an employment arrangement on or after the age of 60;
The member has died.
A person’s preservation age is the age below which they can only access superannuation in certain restricted special circumstances (see below). Preservation ages are changed from time to time, such that an individual’s preservation age depends on when they were born. The following table shows preservation ages for people with different dates of birth:
Date of birth
Preservation age (years)
Before 1 July 1960
55
1 July 1960 – 30 June 1961
56
1 July 1961 – 30 June 1962
57
1 July 1962 – 30 June 1963
58
1 July 1963 – 30 June 1964
59
After 30 June 1964
60
Special Circumstances
Members can also access their super in other special circumstances, including:
Termination of gainful employment;
Permanent incapacity;
Temporary incapacity;
Severe financial hardship;
Compassionate grounds;
Terminal medical condition.
The trustee of the super fund must ensure that the member has met a condition of release or a special circumstance before any funds can be released to the member. Funds that are released to a member who has not met a condition of release are treated as ordinary income and taxed at the member’s marginal tax rate (i.e the funds are not treated as super benefits).
How to withdraw the money
There are two broad ways in which benefits can be withdrawn from a super fund: as a lump sum or as an income stream (also known as a pension). You can apply a combination of both of these methods.
When deciding how best to withdraw money, you need to consider how you will use the withdrawn money. If the money is going to be saved outside of superannuation, with smaller amounts used to finance lifestyle on a month by month basis, then it generally makes sense to leave the bulk of the money within superannuation and to withdraw what is needed as a pension over time.
Conversely, if the money is going to be immediately spent, then a lump sum can make more sense.
Income streams or pensions
When using an income stream, you keep the majority of your benefits within superannuation and withdraw a relatively small amount each year. The yearly withdrawal can happen all at once, or in smaller amounts during the year (for example, monthly).
The government encourages people to use this method as this method preserves more superannuation benefits for future use, which reduces reliance on social security payments later in life. The main encouragement for people using an income stream is that no tax is paid on investment returns for assets being used to finance the income stream. This includes both income returns (such as interest or dividends) and capital gains.
This means that the superannuation fund becomes a tax-free investment vehicle once an income stream has been commenced. Zero tax is hard to beat!
From 1 July 2017, there are a couple of significant modifications to the income stream arrangements. The first is to restrict the zero tax arrangement to income streams paid after a full retirement or after the member turns 60. Prior to 1 July 2017, assets used to finance what is known as a ‘transition to retirement income stream’ (see below) also enjoyed tax-free status on their earnings and capital gains.
Secondly, the tax-free treatment for earnings generated on assets used to finance an income stream is now limited to an amount of assets worth no more than $1.6 million. For the vast majority of people, this upper limit is well in advance of their total superannuation, and so the limit does not really have an impact. For those people fortunate enough to have more than $1.6 million in superannuation benefits, earnings on assets in advance of $1.6 million remain taxable at the standard superannuation tax rates of 15% for income and 10% for capital gains on assets held for more than 12 months.
The tax-free status for superannuation funds that are paying an income stream generally means that anybody who has retired and has met a condition of release should commence payment of a pension. Under the rules of a pension, the money actually has to be withdrawn from superannuation, but in many cases it is possible for a member to ‘re-contribute’ excess money back into their superannuation fund in the form of a non-concessional contribution. As of the 2023-2024 financial year, the work test for individuals aged 67 to 74 making voluntary contributions has been removed. This could potentially affect the strategy of withdrawing and re-contributing superannuation funds.
Transition to retirement income streams
A transition to retirement income stream allows a person who has reached preservation age to start drawing income from their superannuation benefits while still working. The idea behind this type of pension is to discourage people from leaving the workforce altogether. As an incentive to stay in work, when transition to retirement pensions were first introduced, it was decided that earnings on assets used to finance the pension would not be taxed. This included capital gains, such that superannuation fund for people using a transition to retirement pension basically became a tax-free enterprise.
This was a generous incentive and in the 2016 budget, it was decided that this was too generous an incentive! As of 1 July 2017, earnings and capital gains on assets used to finance a transition to retirement pension are no longer tax-free. This reduced the attraction of such a pension for a lot of people. Basically, anyone who does not need the pension to finance their daily lifestyle probably does not need to bother commencing a transition to retirement income stream. However, for people who are working but really do need to access their superannuation to finance their lifestyle (for example, people working on a very part-time basis) a transition to retirement pension may still make sense.
Lump sums
Lump-sum withdrawals from superannuation are often used to finance some form of one-off payment. This can include things like paying out home loans, purchasing a new home, paying for holidays, buying a new car, helping adult children out financially, etc.
If a person elects to withdraw a lump sum from their superannuation fund, they do not have to withdraw their entire balance. Whether a person should withdraw more than they need to finance a particular purchase will depend on how they will invest or otherwise use that money in excess of their needs.
Generally, it makes sense to leave as much wealth as possible within the low taxed environment of superannuation. However, individual tax circumstances can vary, and so it is always worth taking advice when considering how to treat money held within superannuation for which there is no immediate need.
Chapter 6: Self-Employment and Super
For self-employed people, super is simply too easy to ignore. Superannuation is not compulsory for self-employed people (it is compulsory that they pay it on behalf of their employees – but not themselves), which means that many businesses prefer instead to use all cash generated from their business to meet the expenses of the business and their day-to-day financial needs. Superannuation often becomes something they will attend to ‘next year.’
Too many small business owners consider the business itself to be ‘our super.’ This is a mistake and can seriously compromise wealth creation and the retirement lifestyle of these business owners.
Superannuation can be especially useful for self-employed people. There are various reasons for this, and some of the more substantial reasons are discussed below.
Tax advantages
The tax advantaged nature of superannuation is not unique to self-employed people. But it is something that all self-employed people should be aware of. Basically, taxable income that is contributed into superannuation typically reduces the amount of wealth lost to tax on that income.
For example, a self-employed person with business profits of $80,000 a year faces a marginal income tax rate of 32.5%, and a Medicare levy of 2%. If a self-employed person decides to contribute $10,000 into superannuation, then their after-tax income falls by just $6,550 ( $10,000 x (1-34.5%) ). Within a superannuation fund, the $10,000 is taxed at just 15%, leaving her with benefits worth $8,500. So, the member gives up $6,550 worth of immediate spending power but acquires an asset worth $8,500. That is the equivalent of an immediate investment return of 29% on the $6,550.
If the individual’s marginal tax rate is higher, then the equivalent investment return is also a higher.
Asset protection
Benefits held within superannuation fund are often beyond the reach of creditors in the event that the self-employed person becomes unable to pay their business debts. If there is any threat of litigation against a business owner, this can be a real benefit to the member.
There are some caveats here. Superannuation is not allowed to be misused as a way of simply avoiding liabilities. The courts can ‘undo’ amounts that have been transferred into superannuation with the specific intention of avoiding a liability to repay debts. This is why a regular, systematic use of superannuation as a means of accumulating wealth makes even more sense – rather than making a huge contribution just before your business goes bust.
Complementarity
Often, superannuation benefits can be managed as a way of complementing other parts of a financial plan. There are various ways in which this can happen.
One way is for a self managed superannuation fund to be used to purchase business premises from which a business is run. Generally, assets held within superannuation cannot be used for personal purposes. However, if a self managed superannuation fund purchases premises and then leases those premises to the business for an arm’s-length rent, this is generally okay.
There are a number of benefits here. One is that the business owner can take effective control of both sides of the tenancy: their superannuation fund is the landlord and their business is the tenant. The second is a business premises can often be wonderful investments in their own right, and this can be especially the case where there is a long term secure and profitable tenant in place.
Thirdly, given that the amount of concessional contributions that can be made into superannuation are limited each year, paying rent to a self managed super fund is another way of increasing the income of that fund. That said, business owners need to take care that the amount of rent paid to a self managed superannuation fund as a landlord is no more than would be paid to any other landlord who owned a similar building. You simply cannot use the investment as a way of getting extra money into super.
Fourthly, while the rent is deductible to the business at the effective marginal income tax rate of the business owner, the rent is only taxable in the hands of the superannuation fund at the superannuation tax rate of 15%. Usually, this results in a net tax saving.
Automating the process
Over the years, we have learned that human nature tends to put things off until tomorrow – and it does this every day! For that reason, many business owners find themselves in late June, scratching around to find some cash to deposit into a superannuation fund before 30 June. This is not the best way to go.
A much better way to go is to automate a process so that one 12th of your budgeted annual contributions are paid into your superannuation fund each month. This can often be done using a simple direct debit mechanism, and allows you ‘to set and forget’ your superannuation contributions.
Setting and forgetting is much better than the alternative: simply forgetting! If you think this would suit you, then get in touch and we will show you how.
Last updated: Dec 2023
Superannuation, or ‘super’ as it is more often known, is a major element of most people’s personal financial management. Apart from their own home, for many people superannuation comprises much of their entire personal wealth. It is very important.
Super is basically a form of compulsory saving for employees and a form of tax-advantaged investment for all working people, whether they be employees, self-employed (including investors) or no longer working.
In this guide, we introduce the basics of superannuation: what super is for, how money ‘gets in’ to super, how it is managed when it gets there, how it can be used both while it is in the fund and when it is paid out. We also include some particular comments about women and super.
Please feel free to send a link for this e-book to any other person who would find it helpful. And, if you would like to discuss your own super situation, please do not hesitate to contact us.
The tax advantage for concessional contributions is a ‘limited offer.’ As of the 2023-2024 financial year, concessional contributions are subject to an annual cap of $27,500. This cap includes employer contributions under the Superannuation Guarantee (now 11%), salary sacrificed amounts, and any personal deductible contributions.
If contributions exceed this cap, the excess is added to your taxable income, and you’ll pay tax on them at your marginal rate. However, individuals with a total super balance of less than $500,000 have the option to carry forward unused portions of this cap for up to five years, potentially allowing for higher contributions in future years.
One of the main reasons to roll benefits over from one fund to another is to consolidate benefits that are spread across a number of funds into just one or two funds.
Under the terms of the superannuation guarantee, employers must make superannuation contributions on behalf of eligible employees. Employers often have a preferred fund into which they pay contributions on behalf of their employees. This can often mean that people who change employers end up with benefits being held in more than one fund. (This can be particularly the case for older workers who have been working for longer, as there used to be less discretion for people as to where their employer paid their super).
Consolidating benefits into one fund can reduce the administrative burden of managing superannuation benefits. It can be easier to manage superannuation when all benefits are held in a single account.
As well as administrative ease, consolidating funds often reduces the overall level of fees paid by the member. Superannuation funds typically charge two types of fee: flat fees that are imposed regardless of the balance of member benefits within the fund; and variable fees that change according to the balance of member benefits within the fund.
Consolidating superannuation funds typically reduces the overall amount of ‘flat fees’ paid by a member. As the name suggests, flat fees are payable irrespective of the level of benefits within the fund. This means that two funds lead to two sets of flat fees, and so on, whereas one fund will only incur one set of flat fees, regardless of the balance within the fund.
For example, a person may have two superannuation funds and hold $20,000 of benefits in each of them. If they are paying a flat fee of $200 per year per fund, this is $400 in total, or 1% of their total benefits of $40,000. If they consolidate their benefits into one fund, and therefore only pay a single flat fee of $200 per year, then the total fee falls to 0.5% of their benefits.
As discussed above, super funds typically charge members a mix of ‘flat’ administrative fees and percentage-based management fees. Consolidating superannuation benefits into a single fund can minimise the flat administrative fees that are paid on the total benefits.
Additionally, rolling benefits from one fund to another can reduce the variable management fee that is paid if the ‘new’ fund charges lower fees than the ‘old’ one. Most super funds invest in the same or similar investment markets. Therefore, for a given allocation between growth and conservative assets, most super funds achieve similar investment results. Attaining a lower price for the management of these investments can make good sense.
Management fees are not the only fee that can vary between funds. Insurance fees can also differ between two or more funds. Therefore, it can be possible to obtain cheaper insurance by moving from one fund to another. However, we do urge some caution here: when comparing two or more policies, a lower premium is only a benefit if the policies are the same (or the cheaper one is better). When it comes to insurances, lower prices are not always better.
To understand this, think about what the insurer is doing: it is setting a premium at a level that it thinks will allow it to pay out all claims and still make a profit. If an insurer is setting lower premiums, then it is either (i) more efficient; (ii) prepared to accept a lower profit; or – very importantly – (iii) anticipating paying out fewer claims.
If an insurer is anticipating that it will pay fewer claims, this may indicate that its policy is more restrictive. If the relatively lower expected claims lead to lower prices, then the cheapest policy is not necessarily the best. This is especially the case if the policy is so restrictive that a client has a greater chance of having a claim refused.
Remember, if a claim is refused, it was a waste of money having the policy in the first place.
Put very simply, managed superannuation funds generally invest in one of three types of asset: cash and cash equivalents; property (including property trusts and other managed property investments); and equities (generally shares, but also similar types of security). Cash and cash equivalents are considered to be lower risk investments, while property or share-based investments tend to be higher risk. In order to justify this higher-risk, these assets typically offer the opportunity for greater investment returns than can be achieved with cash or cash equivalent investments.
So, when a member of a fund exercises discretion for a particular investment profile (for example, high growth), the superannuation fund will direct that member’s benefits towards investments that meet that profile.
Managed superannuation funds tend to charge a fee for managing investments. This fee varies both between funds and within funds, depending on the type of investment being undertaken.
The term ‘investment profile’ refers to the level of risk to which investment assets are to be exposed. At one end of the spectrum is what is known as a conservative investment strategy. If a conservative investment strategy is applied, investments such as cash and cash equivalents will typically be preferred over equities. At the other end of the spectrum is what is known as a high growth investment strategy. Under a high growth investment strategy, investments such as equities are typically preferred.
Put very generally, the preferred investment profile is most influenced by how soon an investor is going to need the money being invested. If money is needed in the short-term, a conservative investment profile is typically applied. If money is not needed until the very long term, then a high growth strategy generally makes more sense.
It is worth remembering that superannuation assets are different to other forms of assets that the person may have. The main difference is that assets held within superannuation are preserved until the member reaches preservation age. In addition, assets held within superannuation are intended to finance a retirement, which may last 20 years or more.
As a result, people frequently underestimate how long-term the investment strategy for their superannuation benefits should be. Generally speaking, people can tend to hold or convert their superannuation investments to a conservative strategy too soon.
In many ways, it makes sense to establish a specific preferred investment profile for superannuation assets that may well differ from the investment profile that applies to non-superannuation assets. Consider, for example, Julian. He is aged 30 and is saving to purchase a family home. Julian has $50,000 in personal savings and $20,000 in superannuation benefits. Because the $50,000 will soon be needed to buy a home, a conservative investment approach makes sense for this money.
Conversely, Julian cannot access his superannuation for at least another 25 years. Therefore, a conservative strategy makes no sense for the $20,000 held in superannuation. That money would more typically be invested in some form of high growth option.
In this way, the same person can have two or more investment profiles for different elements of their financial management. Retirement savings can be managed using a different investment profile than personal savings. It usually all comes down to when the member will need the money.
Because money held within superannuation is not available to pre-retirees anyway, using superannuation benefits to purchase life insurance means that the individual does not have to use their current disposable income to make the purchase. This can be very advantageous, because the need for life insurance typically arises at the same time as there are many claims on a person’s disposable income. Again, the most common example is a parent of dependent children. Dependent children are expensive, which can make it very difficult for a parent to forego day-to-day spending money in order to purchase life insurance.
What a paradox: the very reason you need life insurance makes life insurance more difficult to afford! Put another way: the easier it is to afford life insurance, the less life insurance you need.
Of course, if superannuation benefits are used to purchase life insurance, then there will be fewer benefits remaining when the person eventually retires. If you spend some of your super, then you will be left with less super.
If a person wishes to restore their superannuation balance, then this can be a simple matter of either increasing the level of contribution in the current or future years, or deferring retirement for a period of time and using the extra time in the workforce to facilitate increased contributions into super. Deferring retirement also has the advantage of shortening the period of time over which superannuation benefits need to be spent.
Sometimes people argue that using superannuation to purchase life insurance reduces the amount available for retirement. This is not actually true. If the tax treatment means you spend fewer dollars when you buy your life insurance through super, you will be better off financially. The amount by which you are ‘better off’ is equal to the tax benefit that you receive. The point is that the total amount available for retirement – which includes personal savings as well as superannuation benefits – is higher than it would be if premiums were not paid via super.
Of course – whether you actually save the money made available is what will actually dictate how much money you have to retire!
The government encourages people to use this method as this method preserves more superannuation benefits for future use, which reduces reliance on social security payments later in life. The main encouragement for people using an income stream is that no tax is paid on investment returns for assets being used to finance the income stream. This includes both income returns (such as interest or dividends) and capital gains.
This means that the superannuation fund becomes a tax-free investment vehicle once an income stream has been commenced. Zero tax is hard to beat!
From 1 July 2017, there are a couple of significant modifications to the income stream arrangements. The first is to restrict the zero tax arrangement to income streams paid after a full retirement or after the member turns 60. Prior to 1 July 2017, assets used to finance what is known as a ‘transition to retirement income stream’ (see below) also enjoyed tax-free status on their earnings and capital gains.
Secondly, the tax-free treatment for earnings generated on assets used to finance an income stream is now limited to an amount of assets worth no more than $1.6 million. For the vast majority of people, this upper limit is well in advance of their total superannuation, and so the limit does not really have an impact. For those people fortunate enough to have more than $1.6 million in superannuation benefits, earnings on assets in advance of $1.6 million remain taxable at the standard superannuation tax rates of 15% for income and 10% for capital gains on assets held for more than 12 months.
The tax-free status for superannuation funds that are paying an income stream generally means that anybody who has retired and has met a condition of release should commence payment of a pension. Under the rules of a pension, the money actually has to be withdrawn from superannuation, but in many cases it is possible for a member to ‘re-contribute’ excess money back into their superannuation fund in the form of a non-concessional contribution. As of the 2023-2024 financial year, the work test for individuals aged 67 to 74 making voluntary contributions has been removed. This could potentially affect the strategy of withdrawing and re-contributing superannuation funds.
For self-employed people, super is simply too easy to ignore. Superannuation is not compulsory for self-employed people (it is compulsory that they pay it on behalf of their employees – but not themselves), which means that many businesses prefer instead to use all cash generated from their business to meet the expenses of the business and their day-to-day financial needs. Superannuation often becomes something they will attend to ‘next year.’
Too many small business owners consider the business itself to be ‘our super.’ This is a mistake and can seriously compromise wealth creation and the retirement lifestyle of these business owners.
Superannuation can be especially useful for self-employed people. There are various reasons for this, and some of the more substantial reasons are discussed below.
A much better way to go is to automate a process so that one 12th of your budgeted annual contributions are paid into your superannuation fund each month. This can often be done using a simple direct debit mechanism, and allows you ‘to set and forget’ your superannuation contributions.
Setting and forgetting is much better than the alternative: simply forgetting! If you think this would suit you, then get in touch and we will show you how.