A beginner's guide to super

Australia's superannuation system is complex. This guide will walk you through its core elements.

To help Australians to retire with some degree of financial security, successive Australian governments have developed our retirement income system.

It is a combination of your age pension, your superannuation savings, and extra savings supplemented by special benefits for lower-income earners.

Three pillars of our retirement system

These core elements comprise what are known as the 'three pillars' of Australia's retirement income system.

Pillar 1: A means-tested and publicly funded age pension

If you are older than 65, have retired and satisfy the age pension income and assets tests, you could receive an annual age pension of up to $27,664 per year if you are single or up to $41,704 per year for a couple. By 2023, the age at which you may qualify to receive the age pension will have progressively increased to 67 years.

Pillar 2: Superannuation savings

To encourage you to supplement your age pension, Australians can set up a superannuation account, which is a long-term account dedicated to holding your retirement savings. Employers are required to contribute (deposit) at least 11% of their employees' salary into their superannuation account through the SG system. You are also allowed to contribute extra money into your account and can choose to set up other accounts in addition to the one chosen or used by your employer.

The good news is these superannuation contributions and your account's investment earnings are taxed concessionally at a nominal 15% rather than at your marginal income tax rates. There are generous limits regarding how much you can contribute or receive as tax-free retirement benefits.

Pillar 3: Voluntary extra savings

You can boost your retirement savings by taking advantage of other concessional taxation arrangements outside of the superannuation system, such as negative gearing, capital gains tax concessions or franking credits.

Low-income earners are directly subsidised to make extra personal superannuation contributions.

While many people still qualify for the age pension, as superannuation savings grow and increase in importance for more Australians, when people retire they may find they qualify only for a part-rate age pension.

There are four key decisions you need to make regarding your superannuation savings:

  1. How you choose a super fund.
  2. How you can contribute to superannuation.
  3. How your super savings are invested.
  4. How you can receive your benefits.

1. How you choose a super fund

Most people are first introduced to superannuation through their employer, who pays their compulsory contributions (currently equivalent to 11% of their annual salary) into their default superannuation fund, unless an employee has nominated another fund.

These compulsory contributions are known as the superannuation guarantee (SG).

Compulsory contributions can only be paid into complying superannuation funds that have been authorised by the superannuation regulator APRA.

If you are eligible for super choice, that is, you can choose your own super fund, your employer is not allowed to restrict your choice of fund. But it is not your employer's responsibility to make sure you are a member of that fund.

If you're already a member of a super fund, your employer cannot force you to join their company's default fund. They have to let you use your current super fund if you wish. This process is known as 'stapling' you to your preferred superannuation fund.

This is intended to prevent people having multiple super accounts and potentially paying extra fees or losing track of their accounts.

You can make extra voluntary contributions into your default MySuper fund or other funds of your choice.

These funds might be industry funds, retail funds or self-managed super funds (SMSFs). If you join a fund on your own without going through your employer, you are joining it as an individual personal member.

2. How you can contribute to your super

There are essentially two main categories of superannuation contributions:
• Concessional contributions (tax-deductible)
• Non-concessional contributions (not tax deductible)

The ways in which these contributions can be made, their classifications, and rules relating to the respective amounts you can contribute, are explained in the following section.

Concessional contributions (CCs)

From your employer (SG)

If you are an employee aged 18 years or over, or under 18 years of age and working more than 30 hours per week, your employer must make SG contributions equivalent to 11% of your base salary or wage into your super.

These compulsory employer contributions, which are made on a pre-tax basis, that is, before income tax has been deducted, must be paid into a complying MySuper product, or another superannuation fund or product that you've chosen.

Contributions paid this way are known as concessional contributions (CCs) because you receive a tax concession in association with them.

Concessional contributions are capped at $27,500 per financial year and include all contributions paid by your employer. If your employer contributions are less than $27,500 for a financial year, you can top up your super to this cap by making extra contributions, and claim a tax deduction for the amount contributed.

You can generally contribute up to $27,500 per year on a pre-tax basis into superannuation regardless of your age and income.

Salary sacrifice

If you want to add to your superannuation, you can arrange with your employer to pay or 'sacrifice' part of your salary or wages, before tax is deducted, into your superannuation. This will be a voluntary contribution you are making in addition to your employer's SG payment of 11% of your base salary or wage.

As superannuation is generally taxed at 15%, which is lower than personal marginal tax rates, making such contributions means you will have more money going into your superannuation and also potentially reduce your income tax. This is why salary sacrificing into superannuation can be a very tax-effective way to boost your superannuation savings.

For a salary sacrifice to be effective, you must get your employer to agree with you on the amount you wish to have deducted from your before-tax salary or wage prior to the receipt of those monies into your bank account.

Tax deductions for personal contributions Some people do not receive SG contributions from an employer, for instance, if you are self-employed or work on a contractual basis.

In such cases you can still make concessional contributions up to the cap of $27,500 and claim a tax deduction.

Similarly, employees whose SG contributions add up to less than $27,500 per year can top up their super to the concessional cap, and claim a tax-deduction for the amount of the 'top up'.

Catch-up concessional contributions If you (or your employer) don't make concessional contributions up to the cap of $27,500 in a financial year, you may be able to 'catch-up' over the following five-year period.

For instance, say your employer made SG contributions into your superannuation account of $10,000 in the previous financial year.

The following year, you could contribute concessional contributions up to the cap of $27,500 plus another $17,500, as that is the 'unused' amount from the year before. You can use this 'catch-up' provision for five rolling financial years.

This option is useful, say, if you receive a financial windfall and would like to make tax deductible concessional contributions to super.

But to be eligible to make catch-up contributions, your superannuation balance must be less than $500,000 on June 30 of the previous financial year, and you can only catch up with 'unused' amounts from the past five financial years starting from July 1, 2018.

The low income super tax offset (LISTO) If you earn up to $37,000 a year and receive or make concessional contributions, you may be eligible to receive a LISTO payment of up to $500.

The amount of the LISTO payment is 15% of the concessional contributions for the financial year, up to a maximum of $500. You should receive the LISTO payment automatically once you have filed your tax return.

Catch-up concessional contributions

If you (or your employer) don't make concessional contributions up to the cap of $27,500 in a financial year, you may be able to 'catch-up' over the following five-year period.

For instance, say your employer made SG contributions into your superannuation account of $10,000 in the previous financial year.

The following year, you could contribute concessional contributions up to the cap of $27,500 plus another $17,500, as that is the 'unused' amount from the year before. You can use this 'catch-up' provision for five rolling financial years.

This option is useful, say, if you receive a financial windfall and would like to make taxdeductible concessional contributions to super.

But to be eligible to make catch-up contributions, your superannuation balance must be less than $500,000 on June 30 of the previous financial year, and you can only catch up with 'unused' amounts from the past five financial years starting from July 1, 2018.

The low income super tax offset (LISTO) If you earn up to $37,000 a year and receive or make concessional contributions, you may be eligible to receive a LISTO payment of up to $500.

The amount of the LISTO payment is 15% of the concessional contributions for the financial year, up to a maximum of $500. You should receive the LISTO payment automatically once you have filed your tax return.

Non-concessional contributions (NCCs)

Non-concessional contributions (NCCs) are personal superannuation contributions you can make from aftertax income, for instance, from savings in a bank account.

Such contributions can be up to a $110,000 cap per year, but are not eligible for a tax concession or tax deduction, hence their 'non-concessional' classification.

The bring-forward rule

The bring-forward rule enables people under age 75 to make up to three years' worth of NCCs to their superannuation in a single income year, depending on their superannuation balance.

Essentially, they are bringing forward their caps and can put up to $330,000 - three times the current $110,000 annual NCC cap - into their superannuation in a single financial year without a taxation penalty. They then can't make any more NNCs until the three year period is up.

Government co-contribution

If you earn less than $$43,445 per year, you may be entitled to a special co-contribution from the government of up to $500 if you make non-concessional contributions into your super. The 'matching rate' is 50% - this means you need to contribute $1000 of your own money.

Helping your spouse to boost their super

There are two ways you can help your spouse to boost their super balance:
• Contribution splitting (relates to CCs)
• Spouse contributions (relates to NCCs)

Contribution splitting

You can ask your super fund to transfer up to 85% of your concessional contributions in a financial year (for example, your employer contributions) into your spouse's super account.

Your superannuation contributions can generally only be split in the financial year immediately after the year in which the contributions were made. To split your contribution with your spouse, they must meet the work test (that is, work at least 40 hours over a consecutive 30-day period) if they are between ages 67 and 74. Note:

Contribution splitting is not a spouse contribution.

It's treated as a 'rollover' from one super fund to another and there is no tax deduction. Spouse contributions If your spouse earns less than $40,000 per year, you may be able to make a contribution to their superannuation fund on their behalf. 'Spouse contributions' count towards the spouse's non-concessional contributions cap for the year.

If you contribute $3000 for your spouse, you could claim the maximum tax offset amount of $540, although this reduces gradually as your spouse's income exceeds $37,000 and completely phases out if they earn more than $40,000.

3. How your super savings are invested

When you contribute to superannuation, the fund invests your money into assets, such as shares, property, bonds, cash, infrastructure and other types of investments.

How your money is specifically invested will depend on which investment options you have selected. For example, if you choose a MySuper product, your money will be invested across a diversified portfolio spanning all major asset class types, although it will be weighted in favour of growth assets, such as shares and property.

Similarly, if you have selected, say, investment options explicitly focused on Australian shares, then your superannuation contributions will be used to invest only into Australian shares.

Reflecting this, you should carefully consider the investment choices offered by your fund because your superannuation contributions will be linked to these investments.

4. How you can receive your benefits

Superannuation is a special-purpose savings scheme designed to support you in retirement.

To access your superannuation and begin withdrawing some of your money from your accounts, you need to be older than your preservation age and retired or approaching retirement.

While these complexities can seem confusing, there are nevertheless some core principles to follow:

• You have turned age 65 (even if you haven't retired).
• You have reached your preservation age and retired.
• You have reached your preservation age and even though you are still working you qualify to set up a transition to retirement pension.

There are other circumstances in which you may be able to get access to your superannuation, but these are very limited. For example, you have specific medical conditions, are terminally ill, or are facing severe financial hardship, and you have no other sources of money available. In these cases you may be able to apply to the ATO to make a formal request for early access to your superannuation.

There is also the First Home Super Saver scheme designed to enable people to use their superannuation to help them save a deposit for their first home.

When you have worked through these options and have decided to begin accessing your super, there are two main ways to do this: set up a superannuation income stream or access some or all of your super entitlements as a lump sum.

Superannuation income streams

A superannuation income stream is a special superannuation retirement account that allows you to receive regular payments from your super account every week, month or year. These income stream payments are sometimes referred to as superannuation pension payments or annuities.

These pay you a regular amount over a set period and meet the minimum annual payments for superannuation income streams - the purposes of these minimums being to ensure that retirees spend a reasonable portion of their retirement savings on themselves and so reduce their reliance on the age pension.

These accounts come in two main forms: account-based pension accounts or a non-account based income stream accounts.

Account-based superannuation income streams operate similarly to regular superannuation fund accounts in that they offer investment choices but are supplemented with withdrawal options. Non-account-based income stream accounts (also called annuities), are where you pay, say, $200,000 to your account provider and they agree to pay you a set amount each month until your death.

Once you start a pension or annuity, a minimum amount is required to be paid (drawn down) each year. The table below shows the minimum drawdown rates that apply in 2023-24 (these rates were initially reduced by the government in March 2020 in response to the COVID-19 pandemic, however, this reduction ceased as at June 30, 2023).

Superannuation lump sums

A superannuation lump sum retirement benefit is when you withdraw some or all of your superannuation entitlements in a single payment. You may also be able to withdraw your superannuation across several lump sum payments.

But you need to be aware that if you withdraw your superannuation as a lump sum, this money will no longer be considered as superannuation, so if you invest it, any income it generates may not qualify for concessional tax treatment. That is, income it generates is unlikely to be tax free.

Superannuation death benefits

If you are a retiree and you die leaving some money in your superannuation account, your super fund will pay the balance to your dependants. If you are still working and you die, your super fund will pay out your balance, including any insurance benefits, to your dependants.

To make this process easier, many superannuation funds have set up what are known as binding death benefit nominations, which enable you to stipulate who among your dependants should receive your superannuation benefits. If you have not made such a nomination, the trustee directors of your superannuation fund have to decide who should receive this money.

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