Superannuation
Superannuation – What is it?
Superannuation is a valuable and tax-effective savings system used by individuals to provide for their retirement. While there have been numerous changes to super over recent years, it is still one of the most tax effective means of accumulating wealth and generating income in retirement. Here are the main features and benefits of superannuation.
Superannuation Contributions
Generally, superannuation contributions can be made by and on behalf of a person under age 65. However, contributions can only be made by and on behalf of a person between age 65 and 75 if the work test is met. Couples can also contribute money to super on behalf of each other and in some instances may be eligible for a tax offset.
There are broadly two types of contributions:
- personal after tax contributions known as non-concessional contributions; and
- concessional contributions which are taxed upon entry into the super system.
Both types of contributions have their own advantages and disadvantages and their application can form the basis of a financial strategy.
Benefits of investing into superannuation
- Earnings are taxed at a maximum of 15%;
- Earnings and capital gains are tax free when in pension phase;
- Personal contributions to superannuation can be tax deductible;
- Employer and salary sacrifice contributions are taxed at 15% which is generally less than personal marginal tax rates; and
- Benefits can also be paid tax free to dependants in the event of death and be an effective estate planning investment.
Accessing your superannuation
Since your investment in superannuation is a long-term one and designed to provide a benefit for your ultimate retirement, these funds will generally not be accessible until you retire. Preservation is a term that describes the inability to access your superannuation until you have satisfied a condition of release. For example, funds placed into superannuation are often unable to be withdrawn as a lump sum until you have reached age 65 years or you have permanently retired and reached your preservation age.
The preservation age ranges between 55 – 60 years depending on your date of birth.
Apart from permanent retirement at or beyond preservation age, superannuation can generally only be accessed in the form of a lump sum by death, permanent disablement, temporary incapacity, severe financial hardship or terminal illness.
Please note that superannuation assets can also be accessed by a non-commutable (no capital withdrawal) income stream once you reach your preservation age. Due to the preservation rules, you should only contribute to superannuation using funds that will not be required until retirement and you may need to consider building up investments outside superannuation which are readily accessible.
Retirement income streams
Once you are nearing or have retired, numerous income stream options are available for you to purchase with your super. Some include:
Each income stream has its own features and advantages and one type may be more beneficial to you depending on your situation.
