You may have noticed in recent weeks, there has been quite a lot of discussion around superannuation funds, including a 7:30 report ‘expose’ and Productivity Commission recommendations. Whilst super is a hot topic for the news – for most everyday people, super is something of a mystery.
In this article I want to clear the shroud around superannuation – to give you a quick and clear understanding of how it works and why it exists.
What is superannuation?
I have asked this question many a times throughout my career and whilst I have never had this question answered correctly Some of the most common answers include;
“its my money”
“It’s 9.5% of my wage that goes into an account”
“It’s a bad investment”
“Its my retirement money’.
These are all incorrect.
In simple terms, Superannuation is a tax environment – that is a different set of tax rules than if you were to invest in your own name.
Any income generated within superannuation is taxed at 15%.
If you had the same investment in your own name, it is taxed at your top rate – be that 0%, 19%, 32.5%, 37% or 45% (plus Medicare).
That means, if you invested in the same thing, both directly in your name, and through your super – Super should give you more money at the end of the day, because you’ve paid less tax!
(assuming you earn more than $18,200pa).
That sounds great! Everyone loves paying less tax!
The catch is, you can’t access this money until you are 60 (or if you meet a couple of other specific conditions) and there are limits on how much you can put in.
So, in short, Super is a lower tax environment, to encourage (or force) you to save for your retirement.
Why is superannuation important?
Two hundred years ago retirement was not something everyone had the luxury of doing. Generally, people worked until they dropped – with the life expectancy of 55.2 years in the 1901-1910 decade(ABS, 2009).
The aged pension was introduced in 1910 (ABS, 2009) – and would start at age 65 for men and 60 for women (and you had to be a resident for 25 years). (ABS, 2009)
Over time people started living longer, and the cost of the aged pension on the government started to become quite significant - so in 1983 the government formalised Superannuation following in 1991 with the introduction of compulsory employer contributions in 1991.
This was in an effort to get the population to fund their own retirement and take the pressure off future governments.
Since the formalisation of superannuation, the aged pension has been decreasing in availability and amount, with a broad consensus that it will be abolished (or limited) at some stage due to rising costs and an ageing population.
Super is your own private aged pension savings account – which you can use to save enough to fund your full retirement (a topic of which I will cover another time).
It is not the only means of retirement income, but with the lower tax rate can be a great vehicle to help get you there and should not just be ignored.
IF you want to know more about how to maximise on your superannuation, get in touch at firstname.lastname@example.org
You should also check out our other blog post from this month "How to choose a super fund".
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