Structures - Superannuation
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Structures
This is the last of our 3-part series on structures, finishing with the final investment vehicle used by most Australians, Superannuation.
Superannuation is an effective investment vehicle to save for retirement, however it is a complex and ever-changing area. The combination of regular contributions, long-term compounding and long-time horizons can create a powerful mix with the right investment strategy.
The government continues to support superannuation, by expanding the methods to contribute more to super. Their goal being to encourage people to invest more towards retirement and rely less on government-funded social security benefits in retirement.
Most individuals will have their super with either an industry fund, a retail fund or a Self-Managed Superannuation Fund (SMSF). Each type of fund has its own benefits and nuances. The choice of where to put your retirement savings is a very important one that many individuals overlook. It is worth asking yourself the following questions:
• What investment options do I need?
• Does my fund offer the investment options that I want?
• How much personal involvement and responsibility do I want?
• What are the costs?
• What level of flexibility is available between investment options?
• Do I need insurance?
Superannuation
What is it?
Superannuation can be described as a long-term savings plan for individuals to accumulate wealth during their working life to provide them with an income stream, or lump sum, when they retire. Your super fund needs to meet the sole purpose test to be eligible for any of the tax concessions normally available to super funds. This means the fund needs to be maintained for the sole purpose of providing retirement benefits to members, or to their dependants if a member dies before retirement.
How does it work?
Under the Superannuation Guarantee (SG) your employer/s must pay superannuation contributions of 10.50%*(which will increase to 12% by 2025) of your ordinary time earnings towards your nominated fund. Your fund in turn should use these contributions to invest based on your investment election, which is connected to your risk profile and/or stage of life. There are other methods offered that allow you to contribute more to your super, subject to certain criteria. You can read more about these in our previous weekly.
What are the main benefits?
Arguably the main benefit of super is the tax-efficient environment. During the accumulation phase, investment earnings and contributions are taxed at 15%, as opposed to your marginal tax rate if investing in your personal name. In addition to this, holding CGT assets, such as shares or managed funds, for more than 12 months, means you may be eligible for a discount of up to 33.3% on capital gains. Upon retirement, generally your retirement phase income becomes tax-free, subject to several conditions.
What are the main types of funds?
Industry Fund
Industry funds were established for specific industries or professions such as construction, healthcare or education, and are known as ‘not-for-profit’. They typically offer a limited range of investment options and can charge lower fees when compared to retail funds. There are a board of trustees, with representation from employers and employees.
Retail Fund
Established and ran by financial institutions. They are generally open to anyone via a financial adviser. There is usually a wide range of investment options, such as managed funds, direct equities, separately managed accounts (SMA’s) and term deposits. Governed by a board of trustees appointed by the financial institution.
Self-managed Super Fund
Established by individuals who act as trustees and make investment decisions on behalf of the fund. Limited to a maximum of 4 members, they offer more control and flexibility to the members, but also requires greater time, effort and knowledge to manage effectively. Trustees are subject to strict regulations and compliance requirements by the ATO.
What else should you consider?
It is important to think about fees (such as Administration, Accounting and auditing, Advice and brokerage fees), asset allocation, level of insurance required, and investment options you are currently in, as these will affect the long-term prospects of your super balance. It is also important to consider death benefit nominations, which provide the trustees a direction on the payment of super savings to a beneficiary of your choosing in the event of a member’s death.
There are penalties for the misuse of Superannuation if accessed earlier than allowed. Any amount illegally accessed is included as income in your tax return, even if returned to the fund. There are also tax shortfall penalties and interest on the monies owed. If you are a SMSF trustee allowing illegal early access to Super for a member you may be disqualified as a trustee and liable for administrative penalties.
As always please reach out to the team if you like to discuss further.