SMSF Basics

Basics of Superannuation

Mention Superannuation and most people's eyes glaze over. Either that or they gripe about it and say that its all too hard, or the rules keep changing. Well, like it or not, for most people Super is almost certainly going to figure as one of your most important investment assets, and if you use it properly, it has the potential to be your most profitable and tax effective vehicle in providing you with an outstanding retirement.

And its not as hard as you may think. Contrary to some public opinion, Superannuation can be a wonderful long term savings vehicle with an enormous amount of choice in how you go about it. You just need to get your head around some big picture concepts, and take it all one step at a time.

 

What's Super all about ?

Superannuation is predominantly about this one big question:

 

"What are you going to do for money once you retire?"

 

Your choices are generally going to be:        

 

- Earn income from investing the capital you have accumulated during your working life        

- Perhaps get a full or part Age pension from the Government        

- A combination of the above two (if eligible).

 

There are two major problems with reliance on the Age Pension. Firstly, its just not a lot of money. Its only around 25% of the average wage. So right now, try living on about $15,000 a year, or $25,000 for a couple and see how you go. Secondly, with the Ageing population, the affordability for the nation in supplying these payments in the future will be very stretched due to a smaller number of people working, and hence less taxes available to pay for the higher number of people getting the Age pension. So the bottom line here is that it is going to be in everyone's interest to make sure that everyone has as much of their own capital as possible to fund their income in retirement. And that's where Superannuation comes in, through the range of incentives and concessions that the Government provide to super funds, and the compulsory contributions that your employer has to make each year to your fund. 

 

So what is a Super fund exactly

A super fund is simply a long term savings vehicle which has a range of very generous tax concessions, including when money goes in, while it is invested, and when it comes out as an income stream. The flip side is that there are restrictions on when you can access your money, to ensure that its kept safe and sound until retirement (or in the event of death or disability). It is the Governments way of trying to get us to save as much as possible for retirement, and reduce the future strain on the Age pension system. Please note that for a super fund to receive the generous tax concessions available, it must be a complying super fund, which means that it strictly complies with all the relevant laws set down under the SIS act, and any prudential standards set by the regulators. For more information on the taxation of a super fund, please refer to our SMSF Technical Education & Strategies section.

 

Employer contributions

Part of the Governments policy to ensure that as many people as possible have money going into superannuation every year is the superannuation guarantee contributions (SGC) system. Basically, your employer is required to pay 9% of your ordinary time earnings (up to a limit) into your super fund each year. Your employer or yourself may pay in extra (again, up to a limit) at any time. For more detailed info on contributions and the tax benefits, see our articles in the SMSF Technical Education & Strategies.section. Since July 1^st 2005, most employees have been able to choose the super fund where their employer makes these contributions, which includes DIY / Self Managed Super Funds.

 

What types of Super funds are there ?

So you've now got a handle on what Super is all about and why its important. The most obvious thing now is how to choose the right super fund for you. To do that, your first going to need to understand the different types of super funds that are available.

 

This has two layers:

Firstly, there are two major types of super funds. They are:

 

(a)  Accumulation funds where the final benefit is simply the final account balance. That is, the sum of all the contributions made, plus investment earnings, minus tax and fees over the years. This is the main type of Super fund in Australia.

 

(b)  Defined benefit funds where the final benefit is based on some sort of formulae, such as a multiple of final average salary. These are mainly found in the Government super funds for public servants etc. Note that the most common funds these days by far are Accumulation funds.

 

Next, there are the following sub-groups of super funds:

(a)  Corporate funds
(b)  Public sector funds
(c)   Industry funds
(d)  Retail funds
(e)  Wrap Super Platforms
(f)   Small APRA funds
(g) DIY / Self Managed Super Funds (also known as SMSFs)

 

Self Managed Superannuation

Depending on when you read this, there is around about $1 trillion in the Superannuation system in Australia. And as of 2008, the most amount of this money resides in SMSFs, at around about $350 billion. For a number of years, SMSFs have been the fastest growing segment of the Superannuation system, and right now, that does not look like changing anytime soon.

 

The rest of this website deals with providing information specifically for trustees of DIY / Self Managed Super Funds.