The super lingo you need to get your head around
COVID-19 has put a spotlight on super like never before - with people needing access to their money and paying attention to the balance in their superannuation accounts.
Money's Super Booster campaign is all about encouraging you to check, consolidate and contribute to your super where appropriate this year, to better build your retirement funds.
But before you do that, we know it's easier to get on top of things when you know the lingo. So here are some super terms you might like to know better.
Your beneficiary is the person you want your super benefit to be paid to in the event of your death. The beneficiaries in your Will may be different to those you want your super to go to, and there are restrictions on who can be a beneficiary. Beneficiaries must be dependents, which includes your spouse or partner, children (including stepchildren or adopted children) or any other person who is financially dependent on you. If you don't nominate a beneficiary, the super will be paid to your Estate.
2. Binding and non-binding nominations
Your super fund monies, including your insurance (should you have insurance within your super fund), are not necessarily paid according to your Will or Estate. With a binding nomination, the Trustee of the super fund must pay the death benefits as you have nominated specifically for these funds. Binding nominations will not change automatically in case of marriage or divorce, and for that reason should be reviewed as circumstances change. There are restrictions on who might be a beneficiary. A non-binding nomination allows the Trustee some discretion in directing where the funds are paid.
3. Concessional/non-concessional super contributions
Concessional super contributions are made from your pre-tax income and contributions are taxed at 15%. Non-concessional super contributions are payments made from after-tax dollars so they are not taxed at 15% as the tax has already been paid.
4. Contribution caps
This refers to the maximum amount of money you can put into superannuation to receive beneficial tax treatment. The concessional super cap is $25,000per annum and non-concessional is $100,000 per annum. There are special circumstances for small business owners and some others. Check the ATO website or consult your financial adviser or accountant.
5. Defined benefits
A defined benefits scheme refers to an old superannuation scheme which would typically pay a percentage of your income, or a defined amount for the rest of your life in retirement. Most super schemes now are accumulation funds where your benefit upon retirement is the amount you have built in the fund.
6. ESG and sustainable funds
Environmental, social and corporate governance (ESG) funds are often known as sustainable funds because the focus is on long-term, long-lasting investments. They may be screened to not invest in tobacco, alcohol, gambling and fossil fuels, or invest in positive social impact investments such as affordable housing, and there is typically a focus on diverse and inclusive company leadership.
7. Lifecycle funds
'Lifecycle funds' relates to the process by which a superannuation fund invests your money based on your age group with the intention of reducing your exposure to risk and growth stocks as you get older. These funds work on the basis that when you are younger you can afford more equities and growth stocks in your portfolio because you are a long way from retirement and if your investment drops you will have time to earn it back.
8. Preservation age
This is the age at which you can access your super. A person's preservation age ranges from 55 to 60, depending on your date of birth. The later you were born, the greater the age at which you can access your super. This should not be confused with the age you can access the age pension, which currently ranges from 66 to 67 years.
9. Salary sacrifice
In Australia, the superannuation guarantee, which employers pay into an employee's super account, is 9.5%. If you want to pay more from your pre-tax income (as long as the total contribution is less than $25,000) you can salary sacrifice - which means having your employer take money from your pre-tax salary to put directly into super. When you do the calculations, the amount you put into super from your pre-tax income is less of a sacrifice than you might think, thanks to the 15% concessional tax rate.
10. Transition to retirement income stream
This refers to a strategy that can be used when you reach the age where you are able to access your super and are still working. At this time, you can withdraw some of your super to live on while contributing to your super from your income - thus saving tax when contributing it back to super. That is, you are contributing to your salary with money withdrawn from super and topping it back up via salary sacrifice back into super.