Knowing how Superannuation works and understanding its benefits will ultimately lead to more choice, flexibility, and control over your finances in retirement.
As your Wealth Managers, we specialise in tailoring strategies to ensure your superannuation is working for you. This overview on Superannuation will help you have a greater level of insight into how to use your super to better prepare you for the future.
Why should I contribute to my Superannuation?
Regardless of when you will be able to access your Superannuation, or when you choose to stop working, you need to be aware of how your Superannuation is being managed and if the final balance will be sufficient when you’re ready to retire.
Superannuation is a tax structure, but it should be treated like a valuable financial asset. The fundamental principles of financial planning prescribe that individual tailoring based on your needs, objectives and personal circumstances, is paramount to ensuring you have enough money to enjoy your later years.
One of the appealing aspects of using your Superannuation as an investment vehicle is that the money that goes into your Super Fund, along with the earnings on those contributions, are taxed at a rate that is less than the tax rate for most individuals. This means that less tax is paid on money going into super, compared to receiving the funds as a regular income.
The greater your marginal tax rate, the more advantageous this can be.
How Superannuation works
Managing your Superannuation can be complicated. To help explain this process, let’s use buying a car as an analogy.
When searching for the right superannuation fund, consider what you would look for when buying a new car.
Size, speed and safety
The investments you choose determine the growth of your super. You can select slow and steady investments or faster but riskier investments. If you’re young, high-speed investments are more appealing as you have time to recover if things go wrong.
Safety and reducing risks are a priority consideration, no matter your investment vehicle. When diversifying your investments or arranging life insurance in your Super Fund, ensuring you have the correct insurance is a key consideration.
Education, price and optional extras
It is common to only look at your Super Fund’s annual report and personal statement to see how much you have accumulated, and only seek more information when things go wrong. Being proactive about the performance of your super is like performing a service on your vehicle, it is essential to maintain an optimal performance.
Whether you buy, trade in or sell a car privately, there are many considerations when buying a car. The costs mount up depending on many factors and expenses will include fuel and maintenance costs. Super has the same complexities to consider.
If your Super Fund has more complicated investment options, you may have additional costs compared to a more standard option. The standard option may be cheaper, but it may not meet your needs. Some benefits that may have additional fees include nominating a beneficiary, membership benefits, and even how you receive your Superannuation in the future (via a lump sum or through pension withdrawals).
It can be overwhelming and time-consuming to manage your funds, and your wealth managers can take care of the details when it comes to managing your investments in line with your risk profile, goals and financial strategy.
Taking control of your Superannuation
A Self-Managed Superannuation Fund (SMSF) means that you take control of your Super Funds, instead of pooling your funds with others. Similar to owning your own car instead of carpooling.
Some of the benefits include greater investment choices (such as a property for your business), having a Super Fund tailored to your circumstances, and a risk management strategy tailored to your risk evaluation.
There is more work in managing an SMSF, and the role of your Financial Adviser or Wealth Manager is to develop and maintain an optimal strategy for your investment vehicles to achieve the best possible performance. Our team at Qualia are experienced Wealth Managers and can guide you every step of the way to make informed choices for your short, medium and long-term goals.
The ‘What, Why and How’ of contributing to Superannuation
A Super Fund can either be maintained by professionals or you can do it all yourself. Whether you are looking after your own fund or using a specialist to do the leg work for you, it is important that you understand your options to make your super work for you. Let’s take a closer look at the ways you can contribute to your Super Fund.
What types of contributions can I make?
Pre-tax Superannuation contributions: salary sacrifice/personal deductible contributions
You have the option to request your employer to redirect a portion of your pre-tax salary to your Superannuation account, which is commonly called salary sacrifice or salary packaging.
These payments are called Concessional Contributions and are taxed at 15% which for most people is lower than their marginal tax rate. You benefit because you pay less tax while boosting your retirement savings. This is more tax effective if you earn more than $45,000 per year.
The total amount of contributions you can make is limited. Your Concessional Contribution cap is $27,500 per financial year when you combine the amounts from your employer and salary sacrifice contributions.
Make after-tax Superannuation contributions
This option enables you to make contributions to your Super Fund from your after-tax pay.
These payments are called Non-concessional Contributions because you have already paid tax on this money.
The maximum amount you can contribute, per financial year is $110,000 and you may be able to receive a tax deduction for these contributions. For additional details, please refer to the ATO website.
Complex contribution strategies
There are more complex contribution strategies, and it’s recommended that you talk to us and understand your options before you take any action.
Complex contributions strategies include carrying forward the unused Concessional Contribution cap, Capital Gains Tax Small Business Concession contributions and ‘bring forward arrangements’.
Each of these are complex solutions, and your Wealth Manager will be able to walk you through any options that suit your circumstances and goals.
Low-income Superannuation Tax Offset
You might qualify for a Low-Income Superannuation Tax Offset (LISTO) of up to $500 annually if your earnings are $37,000 or below. You don’t have to take any action, as the ATO will assess your eligibility and deposit the funds into your super account.
Who can contribute to your Superannuation?
You can make personal contributions to super if you are under 75 and employed (including self-employed). Contributions can be accepted by a fund up to 28 days after the month in which you turn 75.
To receive a tax deduction for your contributions, it’s important to keep within the $27,500 yearly limit for Concessional Contributions or the $110,000 limit for Non-concessional Contributions.
If you are between the ages of 67 and 75 you must pass the work test to be able to claim a tax deduction. You can only receive spouse and government co-contributions up to the age of 70.
Getting it right
The rules that govern Superannuation in Australia are complex, to say the least. Retirement might be four years, or forty, away. The time to start focusing on how your Superannuation will work harder for you is now.
Having a successful Superannuation contribution plan can make a huge difference in how confident you feel about your retirement. Making mistakes in this area can be costly, so it’s important to seek expert advice to determine the most effective methods that suit your circumstances.
It’s important to remember that Superannuation is a long-term investment and, as such, requires careful planning and monitoring. The best way to ensure you are making the most of your Superannuation is to seek out the advice of a financial adviser.
We can offer valuable insights into your specific needs and goals and create a tailored plan to help you build a secure retirement. With the right advice and careful management of your super, you’re on track to enjoy a comfortable retirement. Book a chat with our team to find out how we can help.
Information in this article was correct at 9/06/2023. Qualia Wealth does not guarantee accuracy or completeness of information. We recommend that you review all relevant financial, legal and taxation advice before relying on any information provided here. This article has been prepared for informational purposes only and is not intended to provide financial, tax, legal, accounting or other advice.