Future Assist Superannuation Accountants can assist you to consolidate your superannuation or Future Assist can help in establishing an SMSF.
Introduction
This chapter outlines some of the main advantages and disadvantages of superannuation (‘super’) as an investment plan for retirement with regard to each feature of this form of investment. As with any investment, individuals should always seek financial advice and choose the fund that best suits their particular needs.
Concessional contributions
A concessional contribution is a pre-tax contribution made by an employer or a self-employed person. An employer contributes an amount equivalent to at least nine percent of an employee’s gross salary to a superannuation fund. This amount is also called the Superannuation Guarantee. Concessional contributions are considered ‘pre-tax’ because the contributor can claim this money as a tax deduction.
If the employee is under 50 years of age, any concessional contributions up to $50 000 per annum are taxed at 15 percent. The employee does not pay this tax as it comes from the amount in the super fund. Any concessional contribution over $50 000 is taxed at a rate of 31.5 percent, which is about the same rate charged for the equivalent amount in income tax.
Because the 15 percent rate is lower than the income tax rate, it is beneficial for employees to invest in superannuation up to the $50 000 cap. The additional rate above $50 000 ensures that high-income earners do not take unfair advantage of the investment opportunities that superannuation provides. (An employee with a compulsory contribution of $50 000 as nine percent of his or her income earns at least $550 000 per year.)
One rule that came into effect at the beginning of the 2007/08 financial year was to allow people aged 60 or over to receive super benefits tax free if their income source came from a taxed fund. As their fund has already been taxed, retirees do not need to pay an additional tax from their retirement benefit. In the past, retirees were effectively double-taxed so the recent laws make the super system simpler and, in some circumstances, more advantageous as an investment option.
Salary sacrificing is a concessional contribution that employees use to maximise superannuation and minimise tax. Salary sacrificing involves the compulsory nine percent concessional contribution made by your employer and a personal contribution taken out of your gross pay, that is, before you are assessed for income tax. This means that you contribute more to your super fund and you are liable for less income tax because your taxable income is reduced.
Salary sacrificing is attractive because you only pay 15 percent on your superannuation compared with income tax but this method of contribution counts towards the concessional contribution cap of $50 000.
Non-concessional contributions
Individuals can also add to their super funds with their own payments, called non-concessional contributions, to boost retirement investment and encourage long-term growth. These payments come from your net pay, that is, they occur after taxation but they have a few benefits if planned well.
There are certain tax offsets (rebates or deductions) offered on non-concessional contributions, such as if you voluntarily contribute to the superannuation fund of a spouse aged 65 years or less. This is attractive for employees with a spouse who may be unemployed or a low-income earner. The contributor reduces their taxable income and by boosting their spouse’s super fund, they may also reduce the burden of needing to support their spouse in retirement.
The government may offer a co-contribution, which means it will add a certain amount of money to your super fund if you make a non-concessional contribution, for example, if an employee earning less than $28 000 a year contributes $1000 to super, the government will co-contribute $1500, which means that $1000 of the employee’s money will become $2500 in the super account. Co-contributions are limited to low- and middle-income earners.
There is a cap on non-concessional contributions of $150 000 to prevent high-income earners from taking unfair advantage of superannuation investment. Amounts higher than $150 000 are taxed at a rate of 46.5 percent. This is a strong disincentive because non-concessional contributions have come from an employee’s net pay – after they have already paid income tax.
Time
One major advantage of superannuation is the compound interest accrued over decades of a person’s working life. Compound interest is interest earned on the principal amount and the previously gained interest. This means that the investment gains are an important factor in how the fund will grow in the future.
The main disadvantage of superannuation is that it is long-term, so employees need to wait until retirement to access the benefits. For some people this may be good because it teaches them the importance of future planning but other people might regard this type of forced saving as restrictive.
Time is also a factor with regard to the age of the employee. The preservation age(the minimum age at which employees can retire and access their benefits) has risen. As the population’s average life expectancy has increased, the government has calculated that to provide for an ageing population employees will need to work longer. Consider this both an advantage and a disadvantage – you will have more money when you retire but you will need to wait longer for it.
Age also matters when weighing up risk in fund investment. A young employee can afford to take more risk with their investment because they have a long time to recover from possible setbacks. High-risk investments have higher returns so an employee’s willingness to take a risk can accelerate their fund’s growth. Conversely, older employees may be disinclined to take risks when they are closer to retirement because they have fewer opportunities to recover from a bad investment.
Legislation
Legislative reform plays a significant role in weighing up the advantages and disadvantages of superannuation. Legislation that applies to taxation and investment affects the operation of a super fund, so employees and super contributors need to track any changes in case it affects their investment choices.
Fortunately, legislative trends have been towards a simpler superannuation system with the reduction of tax and an increase in incentives to add to super. Although changes tend to affect high income earners, self-employed people and trustees of self-managed funds the most, other employees should remain aware of how legislation influences their benefits.
Future Assist Superannuation Accountants 