INVESTING

13 common super terms you've never really understood

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If all you know about super is that a chunk of your salary disappears each month leaving nothing but a line on a payslip, it's time for a crash course.

Here are the superannuation terms you don't really understand and have been too embarrassed to talk about.

Account-based pension/allocated pension and annuity

An account-based pension, allocated pension and annuity are all ways that you can draw down a pension from your superannuation when you retire after 60.

13 super terms you've never really understood

They are tax effective as you don't pay tax on the money in your allocated pension. There are mandatory amounts you must withdraw each year in an allocated pension, and if you die before the balance is reached your pension can be paid to your estate.

An annuity is similar but you are paid for an agreed duration and you cannot take out the money later in a lump sum if you change your mind. Paid with super money, an annuity also doesn't pay tax on earnings. You can purchase these from your super fund or other financial institution.

The main difference between the two is that the allocated pension is paid as long as your money lasts while the annuity is paid for an agreed period, which may be end of life. Of course, the amount you receive from an annuity takes account of the risk the issuer is taking - that is, that you may live a very long life!

Super beneficiary

This is the person you nominate to receive your superannuation and/or insurance benefit on your death. Your will doesn't usually cover the super benefit that would be paid when you die.

Your super beneficiary can be completely separate from the rest of your estate plans, or can be part of them.

If you don't have a beneficiary, the super can be paid to your estate - however, that will be up to the trustee and this could become protracted.

Further, marriage and divorce have a bearing on your named beneficiary, so if your nomination has not been updated to reflect a change in circumstances, again the trustee may have to make difficult decisions on your behalf.

There are certain restrictions on who can be a beneficiary. They should be a dependant, which can include your current spouse or partner, your children (including stepkids or adopted children) or any other person who is financially dependent on you. The definition of dependence comes into play after death as the purpose of superannuation is to provide for fund members and their dependants, either in retirement or after a member dies. Non-dependent people and adult children who are not financially dependent will have to pay tax on death benefits, while dependants will receive them tax free.

Binding and non-binding nomination

Your super fund money, including your insurance (should you have insurance within your super fund), is 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. In the case of a non-binding nomination, the trustee has discretion to pay the entitlement to the estate, direct it towards another person or pay it as you have requested. A binding nomination will not change automatically in case of marriage or divorce, and for that reason it should be reviewed as circumstances change. There are restrictions on who might be a beneficiary.

Concessional/non-concessional super

Concessional contributions are made from your pre-tax income. Once they are in your super fund they are taxed at 15%. Non-concessional contributions come from your after-tax income. These contributions are not taxed in your super fund as you have already paid tax on them.

Contribution caps

This refers to the maximum amount of money you can put into superannuation to receive beneficial tax treatment. The concessional cap is $25,000 a year and the non-concessional cap is $100,000. There are special circumstances for small business owners and some others. Check the tax office website or ask your financial adviser or accountant.

Defined benefits

Defined benefits refers to an old-style superannuation scheme that, when you retire, would typically pay you a percentage of your income or a defined amount for the rest of your life. It wasn't about how much you had contributed but was focused on what you would receive. This system was found to be unsustainable in the long term, especially when super became available to everyone. In the early days of super it was predominantly paid to public servants.

Excess contributions tax

If you exceed your contributions cap, an extra tax will be levied. It may be as high as 94%, depending on age, which financial year your contributions are made and what kind of contributions they are.

First Home Super Saver scheme

The rules are pretty strict around the First Home Super Saver Scheme. You can start contributing at any age, but can only withdraw money from 18. You must never have owned property in Australia. It works by salary sacrificing into your super account. The amount is capped at $15,000 a year, with a total of eligible contributions set at $30,000.

The benefit is that the favourable tax treatment of salary sacrificed  super will allow your deposit to increase faster than if you were trying to put it away in a non-super account. For example, if you were earning $65,000 and were able to save $8000 by salary sacrificing, your take-home pay would only be reduced by $4480 and after five years your deposit would be $27,992 (Commonwealth Superannuation Corporation).

Preservation age

This is the age at which you can access your super. It ranges from 55 to 60, depending on date of birth. The later you were born, the higher the age you can access your super. This should not be confused with the age at which you can access the aged pension, which ranges from 65 years and six months to 67.

Salary sacrifice

The super guarantee, which employers compulsorily pay into an employee's 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 a year) you can salary sacrifice -your employer takes money from your salary to put directly into super. The amount you put into super from your pre-tax income is less of a sacrifice to your take-home pay because of the tax concessions.

Total super balance (TSB)

This is the amount of your super in accumulation phase and in pension phase, and includes concessional and non-concessional contributions.

Transition to retirement income stream

This refers to a strategy that can be used when you reach the age when 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 back to your super from your income - thus saving tax when re-contributing. That is, you are contributing to your salary with money withdrawn from super and topping up your super with a salary sacrifice.

Transfer balance cap (TBC)

The TBC is the amount of super you can transfer from your accumulation account to your retirement account to receive a tax-free retirement payment. The balance is currently $1.6 million. Any amount outside this will be penalised.

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Julia Newbould is a financial writer and commentator with a background in journalism. She was previously editor of Financial Planning and Super Review magazines; managing editor at InvestorInfo and at Morningstar Australia. Julia co-authored The Joy of Money, a book on women and personal finance, which will be out in April. She holds a Bachelor of Economics from the University of Sydney where she serves on the alumni council.
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