Superannuation is a complicated area of taxation with constant changes to legislation – particularly in relation to when people are approaching and beginning retirement. It is at this time when effective planning can significantly increase a persons or couples net result. The information here is to provide an overview of the issues involved in superannuation planning is by no means exhaustive. We strongly recommend anyone approaching retirement seek professional advice to ensure their benefits are being maximised. This can be achieved simply and legally through careful planning..
People often confuse what superannuation is. The superannuation environment is simply a different tax structure in which to allow people to save for their retirement in a tax effective manner. Holding money in superannuation is no different to holding money in a company structure, trust structure or in individual names except that the taxation and governing rules are different. Superannuation money is still the ownership of the member – you.
Superannuation was relatively scarce prior to 1988. It was the preserve of government employees, senior executives and workers in paternalistic corporations. In 1988, superannuation became part of the awards-based employment structure, which increased the number recipients receiving benefits. Under this system, unions traded off award wage increases for increased superannuation coverage.
Then, on 1st July 1992 the Superannuation Guarantee (SG) scheme was introduced and superannuation became part of most working peoples’ savings. Now the SG covers all employees of a part time and full time nature, with very limited exceptions. The SG prescribes that employers must contribute a set percentage of the employees salary to a regulated superannuation fund. As from 1st July 1999, all contributions to superannuation are preserved until retirement age. The SG rate is currently 9%.
As a result of this increased availability of superannuation to employees there has been increasing demand for employees to have choice in which fund they would like their superannuation to be invested. Legislation was before parliament to ensure that choice is provided to employees, however this was knocked back on its first attempt before receiving Royal Ascent. It is expected that this legislation will be re-introduced to parliament in an attempt to be passed.
In addition to these changes, the superannuation system has undergone enormous changes in regulation, tax rules and social security assessment. In 1996 the Government introduced a surcharge on certain contributions and termination payments, which was intended to limit the wealthy using the superannuation environment to avoid tax. It has turned out to be a good revenue raiser for the government also.
The area of superannuation will continue to be one of much debate over taxation issues and will become an increasingly important area Politically (for parties) as the baby boomers approach retirement.
Types of Funds
There are different types of funds available to hold superannuation money. Employers, at this stage, are not required to provide their employees choice and can decide which type of fund they are going to use for their business superannuation requirements. Broadly, the various types of funds are defined as follows:
Corporate: Employer – sponsored funds where membership is restricted to employees of the enterprise and only according to the membership rules set by the employer sponsor. Large corporate funds tend to be defined benefit funds as they are normally older, while smaller corporate funds are often accumulation funds. Eg. BHP superannuation scheme.
Industry funds: These are normally open to employees in a particular industry or range of industries. The union movement, in conjunction with employer bodies, has set up around 100 schemes, originally established by unions and employer groups to accept productivity payments under industrial awards. These funds became the nominated funds for many workers at the outset of compulsory superannuation. The larger of the industry funds now in existence have recently adopted public offer status allowing them to accept contributions from any person. Typically all industry funds are accumulation funds, bar a few. Eg. HostPlus – Hospitality Industry Fund. C-Bus – Construction Business.
Public sector schemes: These were established by legislation for government employees. These funds were traditionally defined benefit funds but government financial pressures have forced the closure of many of these defined benefit funds, to be replaced by more modest accumulation funds. Eg. VicSuper (Now Government Superannuation Office)
Life office retail: These include personal superannuation and annuity products held in the statutory funds of life companies. Eg. AMP
Other retail: These include personal superannuation products sold through public offer pooled superannuation products and master trusts operated by financial institutions and professional advisors such as accountants and actuaries. Eg. Asgard Master Trust, Colonial First State.
Self Managed Superannuation Funds (SMSF): These have fewer than five members. They are also known as DIY funds or ‘mum and dad’ funds as they were originally named. SMSF’s allow people to operate their own superannuation fund (acting as Trustees) and take full control of their investments. Consequently, all of the responsibility for maintaining the funds compliant status rests with the trustees.
Types of Benefits
Defined Benefit Schemes: Defined benefit schemes are traditionally associated with large corporate and public sector superannuation funds and require complex actuarial funding calculations and regular financial adequacy reviews.
Broadly, the final benefit payable to a member/employee is a function of a number of variables including age, length of membership and salary.
Typically, the benefit is a multiple of a person’s final average salary (normally over the preceding two-year period) at some future date, e.g. at retirement. The benefits may be made in the form of a pension or lump sum. How payments are made will be specified in the trust deed or governing legislation.
Accumulation Benefit Schemes: Under an accumulation style of benefit, funds are contributed into the fund by a member or on a member’s behalf eg. By an employer. Expenses are debited from, and investment earnings are credited to, an individual member’s account balance and the net accumulated balance at any point in time provides the benefit to that member. The benefits may be paid in the form of a pension or lump sum as specified in the trust deed.
There is an important distinction to note between the defined benefit and accumulation type superannuation.
With a defined benefit style superannuation policy, the inherent investment/cost risk lies with the employer who has made a promise to pay a designated amount. Under an accumulation style superannuation policy, investment/cost risk rests with the member and their level of contributions and investments they have selected. There is no guarantee of an end benefit amount.
Accumulation fund members need guidance both on how much money needs to be contributed from time to time and on which superannuation vehicles provide the most cost-efficient and flexible avenues for superannuation accumulation.
Contributing to Superannuation
Why contribute to Super?
For most people, super is a very tax-effective way to save for retirement and/or receive retirement income.
Furthermore, superannuation is a ‘compulsory’ benefit that employers must provide for the employees under the Superannuation Guarantee (SG) system.
Because of its tax effectiveness, many people have arranged to have superannuation as part of their remuneration beyond the compulsory level. Salary sacrifice arrangements illustrate this.
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