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Are you trying to sort your super Australia?
Have you been meaning to get around to working super out? Trying to ignore that nagging feeling you are not invested in the right fund, and not maximising your super potential?
Let’s get it sorted. Commit to spending a few hours choosing a reasonable super fund you will be happy to stick to for the long-term. Make sure you are maximising all the available benefits that suit your personal situation.
Then forget about it (for a while), and let super do it’s thing while you get back to more exciting activities.
What Is Super Australia?
Super in Australia is the governments way of forcing us to save for retirement, long before most of us would even consider it.
Australia introduced compulsory superannuation in 1992, to gradually reduce the population’s dependence on the aged pension.
All employees over aged 18 earning over $450 per month receive compulsory superannuation contributions from their employer. Compulsory contributions have just increased to 10% of base salary, and are scheduled to increase to 12% by 2025. Self employed individuals do not have to contribute to superannuation, but are eligible to.
Investments inside super grow and compound over decades until the member is eligible to withdraw (after age 60 and retired for those born after 1964).
There are over 500 different super funds for employees to choose from, which each offer a variety of investment options, fee structures and insurance products.
elf employed individuals do not have to contribute to superannuation, but are eligible to.
Advantages of Super Australia
The undeniable benefit of contributing to superannuation is a reduction in the tax you pay. Tax benefits are available for anyone earning over $18,200 per year. Tax of 15% is charged on “Concessional” (pre-tax) contributions on entry to the fund.
If you earn more than $250,000 you do have to pay “Division 293” which increases total concession contributions tax to 30%.
Furthermore, investment earnings inside your super account are taxed at just 15%.
These are huge advantages to the high income earner, who will be paying a top rate of 37-45% tax. To limit the excessive advantage to higher income earners, the government caps the contributions you can make pre-tax (concessional) to $27,500 per year.
Disadvantages of Superannuation
Young people often ignore super because they are unable to access it until their preservation age. This lack of liquidity can be seen as an advantage or disadvantage. The reason compulsory superannuation was introduced because most would not start saving for retirement until much later (if at all). Super forces you to stick to investing. But it cannot be withdrawn (generally) in an emergency.
The other issue with super Australia is that the government change the rules. Almost. Every. Year. There is over $2 trillion in super accounts in Australia. The rules will continue to change, and I think probably become less beneficial to high income earners (who benefit the most from super).
There is no standardisation of investment products or fees, making options difficult to compare.
Super Australia – Contribution Confusion
Concessional just means pre-tax contributions. Your employer pays concession contributions to the super fund. Salary sacrificed contributions are also concessional. Eligible employees can save 4-30% on tax. This is an easy and profitable way to build wealth.
Salary sacrificing to superannuation is advantageous to anyone earning over $45,000. The largest barrier to getting started is the application form. It’s also easier to never see the money before it goes into your super than make a voluntary contributions. Salary sacrificing can increase student loan repayment requirements.
Voluntary after tax contributions are Non-concessional. There is a $110,000 annual limit but you are able to bring forward 3 years allowances to contribution $330,000 in one lump sum. It is advantageous to have most assets inside superannuation prior to retirement, so most people take advantage of non-concessional contributions in the years leading up to their preservation age.
It’s More Tax Efficient to Contribute Evenly Over Time
Maximising your non-concessional contributions throughout your career will make saving for retirement painless and relatively easy.
A saver contributing $27,500 per year for their entire career would pay far less tax than almost everyone, whose income starts low and increases over time. Many reading this blog are nurturing a career that later in life will produce a high income, resulting in concessional cap breaches and division 293 tax.
The concessional contribution carry forward rules were introduced in 2019-2020. This means you can make up your underutilised concessional cap within 5 years. This is very generous and can be used to boost super contributions, minimise tax and make up for years of lower income. This is particularly useful for those with a big increase in salary, and those taking extended time off work, or parental leave. This article explains the details.
If you are in a stable, long-term relationship, it is also more efficient to have your combined superannuation evenly share. It is generally not in your favour to look wealthy to the government.
A professional earning $300,000 with a stay at home spouse will pay $25,000 more in annual tax than a household with two working adults earning $150,000 each. It’s a similar situation with superannuation.
Having a super balance in an individual’s name over the “Super Cap” (currently $1.7 million) attracts penalties aimed at limiting the advantages of the wealthy:
- Unable to make non-concessional contributions to boost super before retirement
- Can not rollover more than the cap into an income stream, meaning you continue paying tax at 15% on investment income in an accumulation account. Super income stream under the cap is tax free once you are over age 60
- No longer eligible for co-contribution or spouse contributions tax offset
I think the biggest risk of letting your super cap breach is the likelihood of future legislative changes. Those breaching the super cap will be a tiny minority of the population, meaning its an easy political cash grab.
Mind the Age Gap
An age gap between spouses should also be considered when working out your superannuation strategy.
You will read a lot about putting more super in the older spouse’s super account to allow the younger spouse to be eligible for the aged pension from aged 67.
An individual is not eligible for any aged pension if a spouse is still working and earning $3163.20 or more per fortnight. They also reduce pension eligibility based on assets you own, whether they are producing income or not. This currently excludes the principle place of residence, meaning you could own a 20 bed mansion and still get the aged pension as long as you don’t have much income or other assets. It is very likely this will change to have some limits on the PPOR value. High income earners should assume they will not be eligible for the aged pension.
There is also an argument for keeping super in a younger spouse’s superannuation to increase eligibility for financial assistance for aged care placement for the older spouse. Similar to the aged pension strategy, this will only make a difference in the years between the two spouse’s preservation ages. Any benefits will be wiped out if the younger spouse is still earning an above average income at the time.
For a high income household, there may actually be an advantage to having more in a significantly older spouse’s superannuation. Changes to superannuation generally come with a warning, and those soon to retire are often protected. If your spouse is a few years older than you, they may be less likely to be vulnerable to super Australia legislative changes.
Which Superannuation is Best for You?
On to choosing which of 500 super funds is best for you. Australians can now choose their super fund, or go with the employers recommended fund. As from this year, your initial super fund will stay with you despite job changes until you choose to change.
Super options are not easy to choose. There is little standardization among the options different funds offer. So comparing an “aggressive” option between two super funds is actually comparing two completely different portfolios, with different risk profiles.
It is very easy to become overwhelmed by the responsibility of choosing the right super fund. Just like most things in life, perfect is the enemy of done! Take some time to choose a reasonable fund and stick with it unless there is a very good reason to change.
Chasing super returns by changing your fund every few years to the fund with the best performance. Each super fund has a different investing philosophy. Perhaps the top performing fund last year had a heavy exposure to international equities. International equities did great last year! Hence that fund had above average performance.
But periods of overperformance tend to be followed by periods of underperformance. The time periods are variable, but the trend, known as mean reversion means joining last years winning fund is often a bad move.
So what factors should you consider when choosing a super fund?
It has been well advertised that fees make a huge impact on long term returns. Minimising super fees is critical. Fees are also guaranteed, unlike returns. Funds have variable fee structures. Make sure you compare total fees. There are often administrative and investment fees.
The Money Smarts website has a tool that you can list super funds according to the fees charged, based on a $50,000 balance. Canstar allows comparison based on your age and super balance, but has sponsored links to super funds (a conflict of interest). It’s a good idea to have a look at both and shortlist a selection of 3-5 funds to choose from.
It’s worth trying to get insurance right straight away. If you need to change insurance to a better quality product or increase cover a few years down the track, health problems in the meantime can make you ineligible for insurance. Even seemingly minor health issues can result in insurance companies putting exclusions on your policy. They will minimize any risk they actually ever have to pay out a claim in any way they can.
You have to work out whether it’s worth paying for insurance you don’t need yet to eliminate the risk of becoming ineligible by the time you need more insurance (often when you have kids).
If your insurance is taken out with your super fund, you are tied to them if you don’t want (or can’t) to change insurance policies. This may mean having to keep the super fund open just to fund insurance premiums if you wish to change your super fund later on. This will mean paying two sets of super fees.
Insurance in super is cheap, but often not as inclusive as dedicated insurance policies.
Income protection is the most commonly claimed personal insurance policy. It is also tax deductible if brought outside superannuation. Super fund income protection commonly only pay income for 2 years. If you plan to have a family, particularly on 1 income, consider upgrading to a top quality income protection policy.
If you want to keep income protection inside super, the Canstar comparison website does allow you to filter funds to only those that allow income protection.
Life Insurance and TPD
Life insurance is pretty simple and difficult for insurances to avoid a claim if you die. Total permanent disability cover has a lot of shades of grey. Are you happy to have TPD for any occupation, so as long as you can work any minimum wage job you won’t get to claim on your insurance? The premiums will be far cheaper, and this is often available through your super. If you want a more general TPD policy cover that will pay out if you are no longer able to work in your chosen career, you need an “Own Occupation” policy. A plastic surgeon who amputates multiple fingers reaching under a lawn mower would want to have an own occupation TPD and income protection policy!
Next you can start comparing your shortlisted funds. This is easier if you have some idea of your risk tolerance and ideal asset allocations. Spend some time reading these articles to get a rough idea of what your ideal fund should look like.
Do you want to choose an ethical investment option? How these investments are screened for ethical behaviour vary widely. Reading all the small print associated with the ethical options for each fund. Do any of the options fit your values? Check what the fees are again for this particular option, as some of the ethical funds do come at a premium to reflect the extra work involved.
When looking at investment returns, I think it is best to ignore 1, 3 and even 5 year returns. You do not definitely want the top performer, due to the trend of mean reversion. Make sure your super fund has had good returns over the long term, and the fees, insurance and investment options are appropriate. Chant West have released this graph showing the top super funds performing over 10 years.
Don’t ignore your super Australia! It is one of most Australian’s largest asset, along with the family home. Spend a little to make sure your in the right fund, investment option and salary sacrificing if you’re eligible. Check every year to check on progress, but otherwise let compounding growth do it’s thing.
Your wealth accumulation journey starts as soon as you make the first step. Subscribe to Aussie doc for a weekly email to keep you up to date on track to your goals.
Aussie Doc Freedom is not a financial adviser and does not offer any advice. Information on this website is purely a description of my experiences and learning. Please check with your independent financial adviser or accountant before making any changes.