Is Your Super Enough?
Superannuation is very important to all Australians. Encouraging each Australian to provide for his or her own retirement is a major focus of the Federal Government’s strategy now and into the 21st century. The superannuation initiatives taken by the Government have two main aims:
- To tighten regulations governing the superannuation industry and prevent many of the previous abuses.
- To encourage individuals to provide for their own retirement via the concessionally taxed superannuation system.
In the past decade, retired people dependent on the Age Pension have generally received an income of around 30% of their pre-retirement average annual income. Would you like to live on 30% of your current income ? We assume your answer to this question is “no!” It is natural for retirees to want a level of income sufficient to maintain or improve the lifestyle enjoyed prior to retirement.
The following information provides you with details of how Superannuation can allow you to accumulate your required nest egg for retirement.
Types of Superannuation Contributions
Tax deductible contributions are limited to a Maximum Deductible Contribution (MDC) by the Government.
A self-employed person is able to receive a tax deduction for personal contributions to superannuation.
Superannuation Guarantee Charge
As part of the Government’s thrust for employees to fund their own retirement the Superannuation Guarantee Charge (SGC) was introduced during the early 1990′s. The initial requirement was that at least 3% of salary was to be contributed by employers on behalf of their employees, increased to 9% by the year 2002.
If, as an employee, you also wish to contribute personally to a superannuation fund, it may be preferable to arrange for your employer to make these additional contributions on your behalf as part of your salary package. This method of contributing to superannuation is known as salary sacrifice and ensures you are contributing in the most tax effective manner.
Undeducted contributions are contributions made by an individual to a superannuation fund where a tax deduction is not claimed. There are limits on the value of undeducted contributions that can be made. Undeducted contributions enable individuals to invest their savings in the concessionally taxed superannuation arena.
While superannuation is an extremely important component of retirement planning, it must be remembered that one of its disadvantages is that the contributions will be locked away (preserved) until the contributor is at least age 55 and retired.
Also, from 1/7/1999, all new contributions made to a superannuation fund will be compulsorily preserved to the minimum retirement age.
One of the Government’s intentions is to remove many of the previous superannuation abuses. One of those abuses was “double-dipping”. This involved investors receiving the tax benefits associated with superannuation, withdrawing and spending their retirement savings prior to retirement, and then dipping back into public savings via the Aged Pension.
Preservation is designed to ensure that superannuation benefits are used only for retirement. The rules regarding preservation are complex, but we are happy to answer any question you may have in this area. Access to funds in superannuation is limited and it is an issue that needs to be carefully considered in order to ensure access to funds if you need access to funds .
Advantages of Superannuation
The considerable tax concessions available to superannuation make it a preferred investment strategy. In summary, the advantages are:
- Superannuation and rollover funds are tax advantaged as the maximum taxation rate is limited to 15% on income earned. In addition, this can be substantially offset by imputation credits and capital gains indexing.
- There is no provisional tax or income tax paid on the returns earned by superannuation funds as no income is distributed.
- If superannuation is rolled over then lump sum tax is not paid. This means that the full amount of the superannuation will be available for investment and returns can be earned on the amount of tax that would have been paid had the fund not been rolled over.
- You have the option of choosing an income stream (pension) after retirement in preference to taking a lump sum payment.