Superannuation basics

It’s like a visit to the dentist – you know you should do it, but you keep putting it off. But the sooner you focus on your superannuation, the better off you will be.

Back to basics
A survey by the Institute of Chartered Accountants in Australia found half of all Australians under the age of 45 worry about financing their retirement.

“There’s a really big gap between people’s perceptions and their behaviour with super... it’s a positive sign that they’re thinking about it, but it hasn’t translated into action. They’re interested in the outcome but not the process,” says Linda Elkins, advisory board member of The Financial Literacy Foundation and general manager of education and communication at Sunsuper, an industry super fund.

The challenge here is for the government and industry to reach people who are unconcerned with, or not interested in, investing in super. That’s why the Australian Federal Government has introduced a co-contribution scheme for employees earning less than $58,000 annually. Under this scheme the government contributes $1,500 into the super fund of anyone earning less than $28,000 a year. If you qualify, you have to be willing to match it with an initial $1,000. If you earn more than $28,000 but less than $58,000, you may be eligible for a reduced co-contribution from the government. For more information, take a look at www.ato.gov.au/super.

But remember, it’s no good topping up your super if you end up with huge debts and no way to pay them off at retirement. Your super will be eroded.

“Don’t spend more than you earn,” says Linda Elkins. “Managing money really is all about financial understanding and organising your cash flow. Super is not always the solution. Young people may be best served getting their debts under control or looking at their mortgage... The bottom line is that it comes down to individual circumstances and how well equipped you are.”

 

Choose your own
Superannuation choice or the right to choose your super fund (other than your employer’s scheme) has been around since mid-2005. It means you are able to switch your fund every year (unless your fund has other conditions).

Anne-Marie Corboy, chief executive officer of industry super fund HESTA, which has more than 80 per cent female members, says her company’s research confirms most women are less sure about choosing a fund and more worried about having to rely on partners to support them.

“Use choice as a chance to review the service, costs, ancillary benefits and insurance cover offered by your current superannuation provider as well as any new one. The younger you are, the more important things such as fees and insurance become,” she says.

Some of the new online ratings services allow you to review for free, or for a small fee. Try www.superratings.com.au and www.selectingsuper.com.au.

 

Keeping watch on super
Taking responsibility for your super can be as simple as checking that the right percentage of your income is actually being put into super. Despite the stiff penalties, some small employers fail to honour their commitments until caught out by staff or through an external audit.

Anne-Marie says due to changes to the law in 2005, employers no longer have to declare the amount of money paid into a fund. “We encourage our members to register for our online services so they can regularly check their account,” she says.
Additionally, employees who are salary sacrificing into super at levels well above 9 per cent may find their employer contribution has been reduced or stopped – simply because the individual has reached the 9 per cent threshold.

 

How much do you need?
Experts regard 15 per cent of your income saved into super as the most likely figure to provide you with a comfortable post-work life; according to Westpac-ASFA data, the average older healthy couple needs about $45,000 per year.

Women worse off
Horror stories abound of women not having enough money to live on later in life, despite the Superannuation Guarantee. This is because compulsory super has only been around since 1992/93, when employers were asked to contribute three per cent of our income to super. Progressively, this increased to nine per cent from 2002/03. 

Some other reasons why women face a shortfall in super is because they live longer than men, tend not to have continuous working lives due to child rearing, and often earn less. So we’re significantly worse off than men in how much super we’re likely to have.

Many baby boomers are only now starting to see what can happen when there’s not enough in the pot.

At 55, Leonie* retired early with a lump sum superannuation payout. She had a health scare and needed a break – she considered it might even be a permanent one.

Leonie tried to get planning advice on the tax issues before cashing in her retirement money (there’s about seven Acts under the legislation so it’s necessary to get help -- almost 60 per cent of men and women do seek assistance). But the advice didn’t materialise in time so she simply took the lump sum and put it into a high yielding account with a building society rather than starting a Retirement Savings Account (RSA), which can offer tax benefits.

“When we had a small hospitality business, we were encouraged to put money into super. It wasn’t compulsory for business owners and I didn’t understand it much. The forecasts were good based on the predictions of the funds but during 2000-2003, it didn’t deliver and that really rocked me,” says Leonie.

“I got a tax bill for a considerable amount because I had put too much money into my super in the final year and then taken it out. It was taxed at the old rate of 30 per cent, which is now abolished. I feel very disenchanted about the whole thing,” she says.

Luckily after a year’s overseas sabbatical with her family, Leonie felt reinvigorated --enough to re-enter the workforce. So at 57, she’s working again as a part-time teacher. Under the rules, she can have a new super fund and she’s happy about that because despite accumulating family assets, she’s worried that the initial amount of super isn’t going to be enough to cover true retirement, which on average could easily be another 18 years of life.

Leonie says that with her husband, they live very much for now, and despite having other investments they know they’re not really going in the right direction for retirement.

Super glossary
Superannuation Guarantee: The law under which all employers are required to contribute a minimum of nine per cent of your earnings base, to a super fund of your choice. Part-time workers, kids aged 18 years and under, self-employed and contractors are not covered by this.

Rollover: The transfer of all or part of a person’s superannuation from one fund to another.

Salary sacrifice: An arrangement between you and your employer, where you agree to forego part of your salary or wages (pre-tax) in return for your employer (or someone associated with your employer) providing benefits of a similar value. This has the effect of reducing your taxable earnings.

 

How much do you need?
For anyone considering their super, the first question to ask is: how much do you need to live on in retirement? Mostly, people have a vague idea based on a proportion of their current income. But what’s the right amount?

According to Westpac-ASFA data, the average older healthy couple needs about $45,000 per year. So nine per cent contribution from your income is probably not enough to get there. In fact, experts regard 15 per cent of your income saved into super as the more likely figure to provide you with a comfortable life post-work. If you’re young, this proportion could be less but if you’re heading into your fifties with not much behind you, it may be even be closer to 25 per cent. And if you’re at home with kids, self-employed or a sole trader, you’re not covered by the legislation. So age isn’t always a factor when it comes to investing in super.
* Surname withheld on request.

Words: Julianne Dowling. Photography: Scott Hawkins. Hair & make-up: Lores Giglio