Factsheet: What is superannuation?

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ONLINE TEXT VERSION - July 2014

Super Factsheet #1 

Super is money for your retirement. If you haven't started working yet, it's hard to think of retiring - even the idea of thinking about what you'll be doing when you're 60 probably seems crazy. But super is about planning for a retirement that lets you have the fun life you want - and you need to plan for the party!

To help you on your super journey, you'll read super stories from Nat and his friends. Let's meet Nat first.

Nat is 20. He works as an apprentice chef in a downtown restaurant, earning $28,000 a year. On top of his salary, Nat gets $2,660 a year in super, which his employer pays directly into a super fund for him. Before he started this job, Nat already had $2,000 in super from some part-time jobs during high school.

When you're working

Nat's employer must pay 9.5% of what he earns into a super fund for him (28,000 x 9.5% = $2,660). This is called the super guarantee.

If Nat decides to start his own restaurant down the track, he can pay super into a fund himself. It would be up to him to decide how much money he wants to put into super each year.

Nat's friend Alex is doing medicine and won't be working for a while. So that she doesn't get too far behind with her super, Alex's parents contribute money to a super fund on her behalf. (Unless Alex has some employment income, she won't be eligible for a co-contribution.)

Your employer must pay you the super guarantee unless:

  • you are paid less than $450 (before tax) per month
  • you're under 18 and work 30 hours or less per week.

Choosing a super fund

Nat belongs to his employer's chosen fund (called the default fund).

Nat is happy with this fund because it:

  • only charges a small fee for managing his money
  • offers insurance benefits, which is important in Nat's line of work.

Nat could choose to have his super go to another fund if he wants to.

If you don't choose another super fund, your super money will automatically go to your employer's chosen fund (the default fund). To make sure your super is taxed at a special low rate, any fund you choose must be a complying fund (this means it meets certain legal standards).

Fees are very important as they can have a big impact on how much super you end up with. A 1% difference in fees may not sound like much, but over 40 years can mean a difference of about 19% in your final super balance. For example, if your annual income is $50,000, you could end up with $366,000 in today's dollars compared to $299,000 after 40 years, a difference of $67,000 (or 18.3%).

(This calculation was performed on the MoneySmart's Super calculator. The assumptions are current balance $10,000, 9.5% super guarantee, $100 annual insurance costs and investment earnings of 7.3%pa. Management fees were changed from 0.55% to 1.55% to see the difference. Figures are rounded to the nearest thousand dollars. Changing the assumptions would produce different results.)

Your tax file number

When he started his new job, Nat filled out a tax file number (TFN) declaration form. Nat's employer passed his TFN on to the super fund. If you don't give your fund your TFN it may not accept your contributions or you may pay more tax than you need to. You might also miss out on the government co-contribution if you are eligible.

Your tax file number (TFN) helps keep track of your super, makes sure your super is taxed at a special low rate, and means there are fewer restrictions on you making extra contributions.

How super works

Nat's super money is invested by his super fund with money other people have put into the fund. The money earned on those investments (returns) is added to Nat's super account. This is because Nat is in an 'accumulation' fund.

Nat's fund charges a small fee for managing his money, and he pays $100 per year for insurance cover. The fees and insurance costs are deducted from Nat's account.

The people who look after your super money are called trustees. If they don't do what they are supposed to, they can lose their job or even go to jail.

Type of fund Who can join
Corporate fund You can join if you work for a particular employer or company.
Industry fund Some industry funds are open to everyone. Otherwise you can join if you work in a particular industry or under a particular industrial award.
Retail fund Anyone can join. Financial institutions run these funds.
Self-managed super fund (SMSF) You and up to three other people can join.

Rolling over your super

Nat was quite young when he first started work. He didn't choose his own super fund, so his super money from his part-time jobs during high school automatically went into his employers' default funds.

Nat now belongs to three super funds (including his current employer's fund). This means he gets three statements about his super money and has to pay three lots of fees. Nat is also worried that he'll lose track of his super if he changes jobs again.

Nat decides to consolidate his super by rolling over the money from his other funds to his current fund. He has to fill out some paperwork to get it all sorted, but eventually his money is all in one fund.

You can get a 'portability form' from the Australian Tax Office (ATO) to help you rollover your super. Your super fund may also help you roll over your super.

Making your super grow

Nat has chosen a growth investment strategy for his super. This means that 70-80% of his money is invested in assets such as shares or property.

This strategy offers higher returns over the long term compared to other strategies, but it also has higher risks of losing money in bad years. Because he's still young, Nat has time on his side to recover from any negative returns.

To help his super grow even more, Nat contributes $1,000 a year of his own after-tax money into his super fund. This means he gets extra super money from the government (called a government co-contribution).

When can you get your super?

Unlike the money in his bank savings account, Nat can't take his super money out whenever he wants to. This is because super is meant to support you in retirement.

Nat can get his super when he turns 60 and stops working full-time. (If he becomes sick or is injured and can't work again, he might be able to take some of it out earlier.)

When he joined his super fund, Nat nominated his parents and his sister to get his super if he dies before retiring.

Nat's lifetime super decisions

  1. Nat has some part-time jobs during high school. Keep track of your super and keep it all in one super fund if you can. You can have money in more than one super fund, but all super funds charge fees. Generally it saves time and money to consolidate your super (that is, bring all your super together in one fund).
  2. Nat gets a full-time job as an apprentice chef.
    When you're young, it might suit you to choose a 'growth' or a 'balanced' strategy as you have time to recover from any negative returns. Consider contributing some of your own money into super, as you may get a co-contribution from the government, if you earn under a certain amount. You can generally choose how your super money is invested. The investment option or strategy you choose will affect how your super money grows over time. Different strategies might suit different life stages, and it also depends on how much risk you're comfortable with.
  3. Nat is now a fully qualified chef and gets a pay rise. Consider contributing some of your higher salary to your super. If you get a bonus, think about putting it straight into super to boost your savings.
  4. Nat decides to start his own restaurant. Review how your super is performing. If you're self-employed, make sure you keep up your super contributions. You might also lose important insurance benefits if you stop contributing.
  5. Nat settles down with a partner and starts a family. If you or your partner takes time out from work, see if you can contribute super for each other. Check that you have adequate insurance benefits through your super fund.
  6. Nat's restaurant business is booming. He's earning great money. But he's starting to slow down and plans to retire soon. Consider making extra contributions to super to boost your balance before retirement. Review your investment strategy to ensure it's appropriate for your needs. Consider getting personal financial advice from a licensed financial planner about the best option for you.
  7. After a fabulous farewell party at the restaurant, Nat celebrates his retirement with a trip to Paris with some friends. You might take a small percentage of your super as a lump sum to do something that's fun like take a trip. But you should think about taking most of your super as a regular income for your retirement. Budget carefully so that your super money lasts as long as you do!

Is there an alternative?

As an alternative to super, Nat could open a retirement savings account (RSA).

In a RSA, Nat's money would be 'capital guaranteed'. This means that Nat would get back at least as much money as he put in.

RSAs tend to use a more conservative investment strategy with a lower return (similar to interest on a bank account). Super funds are generally designed to give you better returns over the long term.

Some reasons why super is great

  1. Generally, returns earned within your super fund are taxed at a lower rate compared to money you earn on a bank account or other investments. This makes super a very good way to invest your money for the long term.
  2. If you can afford it, you can add more of your own money to your super. If you earn less than a certain amount a year, the government might also make a contribution to your super (called a government co-contribution).
  3. You can only get your money out of super before you retire under very strict conditions. So even if you're tempted to spend it on other things, you can't. The money will be there when you need it later on when you finish working.

Facts:

  • Super helps you save so you have enough money to live on when you retire.
  • Your employer pays regular contributions into a super fund for you.
  • You can make your own contributions too.
  • You can only get your super money when you retire.
  • Super is one of the best ways to save money for your future.

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Last updated: 10 Dec 2014