Banking & Saving - The best way to set-up and maintain your Superannuation fund

Superannuation is a method of financially preparing yourself for your retirement. Both yourself and your employer can contribute to it over time and this money is then invested into a variety of  appropriate investments such as shares, property, savings accounts and government bonds.

When you retire, or qualify for your superannuation due to disability or death you will receive the money (less charges and taxes) either as regular payments made periodically, a lump sum payment, or a combination of the two.

The Superannuation Guarantee came into effect on July 1, 1992, making it compulsory for employers to contribute to an employee's superannuation fund.

The minimum amount of the contribution is 9% of an employee's wages. This excludes overtime, fringe benefits and leave loading).

However, not all employees are covered by this “guarantee”. The Superannuation Guarantee Act states that employers are not required to contribute to the Superannuation Guarantee in certain circumstances.

Some of these exceptions include:

• If an employee earns less than $450 per month;
• If an employee works 30 hours per week or less and is under the age of 18;
• If an employee is over the age of 70;
• If an employee is paid to do domestic or private work for 30 hours per week or less.

Can the employer make contributions above the compulsory limit?

An employer is allowed to make higher contributions than the amount specified in the superannuation guarantee, but only as:

• a reward based on the performance of an employee;
• an employers contribution that increases in line with the employees voluntary contribution; 
• a ‘salary-sacrifice’ - this is where the employer makes a contribution which tend to be benefits such that would otherwise be paid as salary.

By seeking advice from a financial advisor you can find out how to get your employer to pay more, but you have to remember that employers are limited by the amount that can be claimed as a deduction for superannuation contributions made.

These limits can change annually so check with your superannuation fund or the Australian Tax Office to find out.

Should employees contribute too?

If you have more disposable income than you require, and feel you are in a position to save this money towards your future, it may be wise to consider making superannuation contributions as opposed to investing it elsewhere.

There are aged limits that dictate whether or not you can contribute to superannuation – for more information on this, see the Australian Taxation Office web site.

Some of the advantages are:

• you generally pay less tax on interest accumulated from superannuation savings than you would on interest from a bank, although it is worth looking into deals on savings accounts as interest rates can work out higher, thus providing better rewards in the long-run;
• the 'salary sacrifice' scheme automatically takes the the superannuation contribution from your salary, which eliminates the possibility of you being tempted to spend the money on anything other than savings.
• There are limits involved to the amount that can be added to the salary sacrifice;
• the interest on superannuation savings is added onto the total investment, so effectively the interest earns more interest.
• The Australian Prudential Regulation Authority (APRA) estimates that a sum of money ‘compounded’ at 7% a year will double in value in ten years;
• you may be able to take advantage of Government incentives offered such as the co-contribution scheme. This scheme allows you to be given up to $1500 from the government when you contribute to your fund.

Go to the Australian Taxation Office web site for details.

tax advantages

• The maximum tax rate for contributions made by your employer is 15%.
• The income earned through the fund's investments is also taxed at a maximum rate of 15%.
• Salary sacrifice contributions are taxed at 15%.
• When an employee reaches the age of 60 they can withdraw their superannuation as a one-off lump sum or tax free income stream.

laws

The main laws that apply to superannuation are the:

• Superannuation Industry Act and Regulations;
• Superannuation Guarantee Act and Regulations;
• Income Tax Assessment Act.

Jargon definitions

Accumulation funds – this is the money is invested and the final benefit depending on the overall contributions, plus earnings of the fund.

Annuity – This is much the same as a pension. You receive regular payments that are made periodically for either a specified amount of time or until you die.

Benefit - the money paid to you out of the superannuation fund or kept on your behalf within the fund.

Contribution - the money paid into the superannuation fund by either yourself or your employer.

Lump sum – the entire fund received in a single one-off payment.

Preserved - money that is held on your behalf that you cannot access until retirement or certain other circumstances, such as reaching a certain age or leaving employment either temporarily or permanently. This includes money contributed by an employer, interest earned on the fund or contributions made by a self-employed person which have been claimed as a tax deduction and any contributions not deducted made after 1 July, 1999.

Rollover - moving money from one fund to another.

What you are entitled to know

You are entitled to certain information from your superannuation fund. This includes:

• a member statement showing the amount of your benefit at the beginning and end of the related period, the amount that is preserved and contact details;
• a fund report showing the fund's financial status;
• notification of any changes that affect you;
• a statement that shows your benefit

 Written by Sam Gooch