Superannuation is simply money paid into a long-term savings and investment account to provide for your retirement in the future. It was introduced in Australia in 1991 and it is compulsory for employers to pay 9.5% of your salary into your chosen superannuation account.
Your superannuation is referred to as being in ‘accumulation’ phase during your working lifetime – accumulating retirement benefits. It is locked until you reach ‘preservation age’ – at the moment that is age 60, and you can begin drawing from it then under certain circumstances.
Employees mostly have a choice as to which fund their contributions are paid. Some government employees don’t have this choice as their contributions will be paid to the government fund.
When starting a new job, it is important that you provide your accumulation account details to your employer with a request to have contributions paid into that fund. If you do not nominate a fund, the employer will pay it to the fund that they use as default and over time and job changes, you will end up with multiple accounts.
This is not a good idea as you will be paying extra fees and you will likely also be paying insurance premiums in each of the funds.
When you join a fund, you have the option of selecting life, total and permanent disablement and/or income protection insurance as part of your membership. The fund will disclose the premiums that you will pay from the balance of your account. If you have multiple funds, you may be paying for more insurance than is needed, on top of the extra administration fees – these things all reduce the amount that is available when you retire.
Selecting some insurance is important, depending on your age and stage of life and you should seek some advice from a qualified person in this regard.
While your benefits are accumulating, your chosen fund manages the investment of your benefit, which is pooled with the benefits of many others. You should select an investment option that you are comfortable with – your money is invested in shares, property and fixed interest and is therefore subject to stock market, interest rate and property market fluctuations. You need to be comfortable with the profile that you choose throughout any period of weakness in these markets. If your profile is too aggressive or risky, you won’t sleep at night. If you choose a profile that is too conservative, your benefit may experience much less growth over time and could fall short of what is needed.
It is a good idea to contribute a little extra to your accumulation account when you are in a position to do so. This can be part of your salary after you have paid tax on it, or it could be pre-tax salary. Contributing pre-tax salary to superannuation is called ‘salary sacrifice’ or ‘personal deductible contributions’ and can assist with reducing how much tax you pay. These pre-tax contributions will help higher income earners and are not really effective for those on lower rates.
After tax contributions don’t lower your personal tax and they need to be made from money that you don’t really need because you can’t touch it before age 60, but if you add $10 from every weekly pay from when you begin working, you will accumulate quite a large amount over your working life.
Even though superannuation money is not available to you for many years, you should always take an interest in it. It is real money and it will really matter in later life when you have finished work. When you do stop working, you can commence drawing a pension – convert your accumulation account into ‘pension phase’. Once you get to here, you will be pleased that you have nurtured your account throughout your working life for this will be funding your retirement dreams.
Please note, this article provides general advice and has not taken your personal or financial circumstances into consideration. If you would like more tailored financial advice, please contact us today. One of our advisers would be delighted to speak with you.