Superannuation - Let’s Bust Some of the Myths
As a financial adviser Superannuation is often something that we discuss fairly often; however it is also something than many investors are very cautious about.
So where has this caution come from?
There are many reasons, but the main one, I believe is lack of understanding / education around what superannuation is and who controls it.
Yes superannuation does have some complex rules and regulation; however, once you know and understand these, it can be a great environment in which you can accumulate wealth.
So what is superannuation?
Effectively, when broken down, Superannuation is simply a tax effective environment that you can accumulate investment assets in, over the longer term.
We say longer term due to the rules and regulations that apply to super, which include:
The Sole Purpose Test. This test requires that funds are maintained by the trustee of the fund (super plan), on behalf of the member (investor) for the sole purpose of the members retirement or their dependents, if a member dies before retirement.
Restricted access to funds. Given the sole purpose test, assets held on members behalves, by the trustee of the fund, are only accessible under certain conditions. Many of which only come into effect when the member:
Reaches Age 65
Reaches preservation age and retires from work
In the event the member experiences financial hardships, or suffers a total and permanent disablement.
‘Preservation Age’ varies depending on the year you were born and ranges from age 55 to 60.
Who controls my super?
You do.
Regardless of where your superannuation is held, you always have control over it. This means you can move it from one superannuation plan to another at any time you wish (unless your ineligible for SuperChoice) or you can change up how your superannuation is invested within your current provider.
We will caution though that if you are considering switching providers or even just underlying investments within the fund, that you need to be aware of the risks of making such changes. Market movements, switching costs and potential loss of insurance cover of just some things you need to consider.
If I control it, then why is a ‘Trustee’ required?
The trustee is responsible for ensuring that as a member you adhere to all the rules and regulations pertaining to superannuation savings. Depending on the type of superannuation plan you hold, it could be a person, persons or a company.
Are all superannuation plans created equal?
On a high level you could say yes, but as a financial planner I have to say no.
At a high level all superannuation plans provide members with the ability to invest funds and some form of access to insurance benefits. When looking at plans at a micro level, there can be large disparities with regards to the type and number of investment options members can invest in, the levels of fees - both administration and investment, access to comprehensive personal insurance or default group insurance, ability for members to nominate binding death beneficiary nominations and even what types of contributions the fund will accept.
What type of superannuation funds are available for us to use?
For simplicity purposes, there are three main types of super plans:
Industry Funds - are usually ran for the purpose of benefiting employees of a certain sector, but have become more accessible to all members of the public. Often have limited investment options, offer group insurance cover and are often limited in the types of contributions they can accept.
Retail/Wholesale Funds & Platforms - are open to all members of the public and are usually recommend by financial advisers as they offer a greater range of investment options, flexibility to switch and/or access various types of investments and will provide access to personalised insurance cover. Also have greater flexibility when it comes to beneficiary nominations and contributions that can be received.
Self Managed Superannuation Funds (SMSF) - a fund that you have absolute total control over. You are also the trustee of the fund, so solely responsible for adhering to all super rules and regulations. Can have up to 6 members and is one of a limited ways investors can hold direct property investments inside the superannuation environment.
What is meant by ‘tax effective environment’?
Tax within the superannuation environment is capped at 15%.
This means that for every $100 your earn in investment earnings, $15.00 tax is paid.
Compare this to investing in your personal name, where your marginal tax rate ranges from 19% to 45%, plus Medicare levy, this is a saving of between $4.00 to $30.00 on every $100 earned.
Personal concessional contributions (tax deductible) into the super environment (subject to annual caps) can also provide opportunities to help minimise personal income taxes. These concessional contributions also incur contributions tax, which is capped at 15%.
How can I find out more?
Read your super statement. You should receive a statement from your fund at least annually.
This statement should tell you most things you need to know about your superannuation plan, including:
Your current balance
Where (and hopefully, how) your funds are invested
Contributions received for the period
Administration fees charged during the period
If you hold insurance cover within your plan, along with the levels of cover and what this cover is costing you.
What your super statement may not tell you is:
What investment fees you are paying
How aggressive or defensive your funds are invested and what specific companies or assets you have exposure to
The breakdown of your super assets, including preservation details
If you have nominated a beneficiary in the event of death and whether this nomination is binding or non binding
Clauses in relation to your insurance cover, where applicable
Some of this can be obtained from the product disclosure statement or the fund providers website or by phoning your provider direct.
If your ready to to take control of your superannuation savings or simply looking for further general advice or education around superannuation, we’d love to help. Contact our office at 03 5443 7220 to discuss our superannuation analysis packages or use the button below to send us a an enquiry email.
The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.