What is an superannuation, why was it introduced and why should it form an important part of your overall wealth strategy?
What is Superannuation?
Superannuation is a special tax structure designed to accumulate and later pay retirement savings for Australian residents.
Superannuation was introduced to Australia as a compulsory retirement savings scheme in 1992.
- Superannuation is like a forced savings mechanism for your retirement.
- Most employers must make super contributions as part of your salary.
- Superannuation is attractive because it offers a special tax rate of 15% on contributions and investment earnings (10% for long term capital gains) and when you retire the tax rate drops to 0%.
The Ageing Population
Superannuation was Australia’s way of addressing the retirement pension dilemma.
Put simply Government revenue is no longer sufficient to provide all retirees with a guaranteed pension, hence superannuation is a way of shifting the responsibility for retirement from the Government, to individuals.
Australia has an aging population:
But with Superannuation our country should be able to manage the increased expenditure on the age pension:
While other countries are are already struggling to keep up and are ill prepared for the future:
How Much Money is in Super?
There are an estimated 30 million superannuation accounts in Australia (yes more accounts than people in Australia), with an estimated balance of $2.1 trillion dollars:
The value of superannuation is expected to more than triple over the next 20 years, from a combination of investment returns and super contributions:
On the World Stage
In 2015 Australia’s superannuation (pension funds) were ranked the third largest in the world:
Value of Super vs Property
Interestingly the Australian property market is currently over 3.2 times larger than superannuation:
How is Super Invested?
The majority of superannuation assets are invested in shares both here in Australia and overseas:
How is Super Taxed?
The biggest benefit of the superannuation structure is that it has a special low tax rate of 15%.
As you can see from the below chart you will pay less tax in super than you will in your own name.
The amounts you can save from the tax man, can be used to help build your retirement nest egg.
What About Tax in Retirement?
Once you retire and start drawing a pension from super, the tax rate will fall to 0%.
How Do You Get Money into Super?
There are two ways to get money into superannuation:
- Your employer is required to pay a percentage of your salary to super currently 9.5% of your ordinary time earnings for 2016/2017 (read more HERE)
- You can make extra contributions to super.
The contributions made by an employer are usually known as concessional contributions because the employer gets a tax deduction for them and they are taxed in super at 15%. This can also include where you make salary sacrifice contributions through your employer. Contributions that you make from cash in your bank account are usually referred to as non-concessional contributions, and no tax is payable on these contributions into super (because you have already paid tax on that money somewhere along the line).
The contributions made by an employer are usually known as concessional contributions because the employer gets a tax deduction for them and they are taxed in super at 15%. This can also include where you make salary sacrifice contributions through your employer.
Contributions that you make from cash in your bank account are usually referred to as non-concessional contributions, and no tax is payable on these contributions into super (because you have already paid tax on that money somewhere along the line).
Superannuation is such an attractive structure that the Government has limited the amount you can contribute.
After all the Government doesn’t want us to hoard all our investments in a low tax structure.
From 1 July 2017, the amount your employer can pay into super and claim a tax deduction for is $25,000 per annum (general concessional contributions cap) for all individuals regardless of age.
The Government will also lower the non-concessional contributions cap to $100,000 per annum. They will also introduce a new constraint so individuals with a balance of $1.6 million or more will no longer be eligible to make non-concessional contributions.
- Superannuation is a special structure to help you build your retirement nest egg
- Superannuation is also known as super
- Super is attractive because of its low tax rate
- Most of our super is invested in shares
The information on this blog and website is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision. We recommend you consult a licensed financial adviser in order to assist you with this.