Is Superannuation still a good investment?

What sort of Investments should I be making?

How much should I contribute each year?

Can I run my own Fund?

How much will it cost?

Superannuation is still an unbelievably attractive ‘wealth creation’ strategy - provided you know what you are doing. That is why we provide a full range of Superannuation services from basic superannuation funds to Do It Yourself arrangements.

We can arrange for you to run your own fund or engage an external professional Fund Manager to do it for you. We will review your strategy on a regular basis, provide regular reports and help you maximise the returns from your Superannuation plan.

Most importantly we will ensure that your Superannuation arrangements integrate with other aspects of your Financial Plan.  

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Consolidating Your Superannuation  

We can assist you to consolidate your superannuation into a fund with low fees and simple administration, please click here

Superannuation Today

Superannuation is very important to all Australians.  Encouraging each Australian to provide for their own retirement is a major focus of the Federal Government’s strategy now and for the 21st century.  The superannuation initiatives taken by the Government have two main aims:

During the past ten years, retired people that are dependent on the Aged Pension have generally received an income of around 30% of their pre-retirement average annual income.

Would you like to live on 30% of your current income?

We would assume your answer to this question is no!  It is natural for you to want a level of income after your retirement sufficient to maintain or improve the lifestyle you were enjoying before retirement.

The following information on Superannuation will provide you with details on how Superannuation may allow you to accumulate your required nest egg on retirement.  

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Contributions

Tax deductible contributions are limited by the Government to the following current levels:

The age based scales for 2004/2005 tax year are:

Age of Member          Maximum Deductible Contribution

Under  35                     $13,934 p.a.

35-49                            $38,702 p.a.

50 & over                     $95,980 p.a.

All the above levels of deductibility are increased each year in line with the Consumer Price Index.  

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Self Employed Persons

Self employed persons are able to receive a tax deduction for personal contributions to superannuation.  They are able to claim the first $5,000 you contribute in full and 75% of contributions over $5,000 to the prescribed limits up to the Maximum Deductible Contribution

Undeducted Contributions

Undeducted contributions are simply contributions made by an individual to a superannuation fund where a tax deduction is not claimed.  There is no limitation as to the amount of undeducted contributions that can be made.  Undeducted contributions enable individuals to invest their savings in the concessionally taxed superannuation arena  

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Superannuation Guarantee Charge

As part of the Government’s thrust for people to fund for their own retirement the Superannuation Guarantee Charge (SGC) was introduced during the early 1990’s.  The current requirement is for at least 9% of salary to be contributed by employers on behalf of their employees.

For 2004/2005 the SGC payable by employers is 9% of salary.  This is capped so SGC contributions will only be deducted up to an annual salary of $128,720.

As an employee you will benefit from SGC employer support contributions at the levels above.  If you also wish to contribute personally to a superannuation fund, it may be preferable to arrange for your employer to make these additional contributions on your behalf as part of your salary package.  This method of contributing to superannuation is known as “salary sacrifice” and ensures you are personally contributing in the most tax effective manner.  

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Superannuation Surcharge

All tax deductible contributions made to superannuation funds by or on behalf of high income earners are subject to a surcharge of up to 15% payable by the funds.

The surcharge is scaled, based on your net taxable income plus deductible super contributions (ATI), from $99,710 to $121,075.

The formula for calculating the Superannuation Surcharge is: [(ATI – 99,710) / 1,582.59259]

Therefore incomes of $121,075 and over will be effectively taxed at 30% on all deductible contributions.

For the purposes of the surcharge only, ATI is defined as taxable income plus any employer/self-employed deductible super contributions for the year of income. Certain termination payments may also be included, and this should be checked prior to taking an ETP.  

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Preservation

Whilst superannuation is extremely important in your overall retirement planning, it must be remembered that tax advantaged contributions you make will be locked away (preserved) until you are at least age 55 and you must be retired.

Also, you need to be aware that commencing from the 1/7/1999, all new contributions made to a superannuation fund were compulsorily preserved to the minimum retirement age 

One of the Government’s intentions is to remove many of the previous superannuation abuses.  One of those abuses was “double-dipping”.  This involved investors receiving the tax benefits associated with superannuation, but withdrawing and spending their retirement savings prior to retirement, then dipping back into the public savings via the Aged Pension.

Preservation is designed to ensure that superannuation benefits are used only for retirement.  The rules regarding preservation are complex, but we are happy to answer any questions you may have in this area.  Access to funds in superannuation is limited and in producing this plan we have considered the preservation issue carefully to ensure you can access non-superannuation funds, if required.  

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Reasonable Benefits Limit

Reasonable Benefit Limits (RBL) are the amounts a person can eventually accumulate in a tax advantaged way in preparation for retirement under the superannuation rules.

For the 2004/2005 financial year, RBL’s will be based on the following match:

Lump Sum RBL          $619,223

Pension RBL               $1,238,440

(* These levels are indexed each year by the movement in wages)

The taxation penalties for amounts in excess of these RBL limits can be significant.  However, it is estimated that up to 80% of retirees will not reach their RBL limit.  If you currently are in an excess benefit situation, or may be one in the future, then it is part of our ongoing service  to ensure your superannuation savings are managed in a way that minimises the impact of this RBL legislation.

Furthermore, in order not to disadvantage individuals with accrued  superannuation benefits higher than the above limits,  transitional rules applied which allowed a greater RBL limit than the current levels. The closing date for applications for a transitional RBL was 1/7/97. Since that date, there are now almost no grounds, for having an application for a transitional RBL considered.  

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Lump Sum Tax

If you decide to take your accumulated benefits in the form of a lump sum payment at retirement legislation imposes a lump sum tax on your benefits.  For individuals who are aged 55 or more at retirement the current level of tax for the 2004/2005 financial year is as follows: 

Pre 1983 service:        5% of the lump sum    (taxed at your marginal tax rate)

 Post 1983 service:     $0 - $123,808 (tax free)

                                    $123,809 and over (15% plus Medicare levy)

For individuals under age 55 the rates of tax are higher and possible alternatives to withdrawing a lump sum should be assessed in these circumstances.

Please note that lump sum tax is also payable on any ad-hoc drawdowns you may make and will reduce the amount you receive “in hand”.  

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Advantages of Superannuation

The considerable tax concessions available to superannuation often makes it a preferred investment strategy.  In summary, the advantages are:

1.      Superannuation and rollover funds are tax advantaged as the maximum taxation rate is limited to 15% on income earned.  Additionally, this can be substantially offset by imputation credits and capital gains indexing within the fund which can reduce this overall income tax rate further.  The superannuation surcharge needs to be assessed when considering the tax advantages.  The next section provides a description of how the superannuation surcharge is intended to work.

2.      There are no provisional or income tax implications from the returns earned by superannuation funds as no income is distributed.

3.      If superannuation funds are rolled over, investment returns are consequently earned on deferred lump sum tax which may otherwise be payable.

4.      You may elect to take an income stream (pension) after retirement as opposed to taking a lump sum.  

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Retirement Income Streams

Annuities and Superannuation Pensions

These are regular income streams that fall into two categories: those that have a fixed term and those that are for life. Fixed term annuities and pensions may also have a residual capital value, in which case they operate in much the same way as a term deposit whereby you receive interest for a particular term and at the end of that term there is a return of capital to you. A non residual capital value annuity or pension will return a mixture of capital and interest to you in regular payments over its life.

It is important to realise that a lifetime pension or annuity will cease upon the death of the annuitant unless it is structured to revert to a spouse or has a guaranteed period. This means that lifetime pensions or annuities are best suited to people in good health and with longer than average life expectancies.

It is also possible to have pensions and annuities indexed for inflation and to nominate a guaranteed period. This means that if the annuitant dies within the guaranteed period, his or her estate will continue to receive the annuity until the guaranteed period has expired. Alternatively, a lump sum may be paid out in lieu of continued annuity payments.

With pensions and annuities, the investment risk is borne by the provider of the pension or annuity. As a result the investment return is strongly correlated to the level of interest rates available at the time that the pension or annuity is taken out. As the amount of pension or annuity income received by you will be related to today’s low interest rates, it is important that you realise that you will be locking into those rates (apart from inflation indexing) for the full term of your pension or annuity.  

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Complying Pensions and Annuities

These can be used when an investor has a superannuation benefit that exceeds the Lump Sum Reasonable Benefits Limit (please see the Taxation section) or where there is a desire to exclude monies from the Centrelink assets test. In order not to be assessed under the assets test, a pension or annuity must fall into one of the following categories in order to be “complying”:

1. Must be a lifetime pension or annuity and have the following characteristics

Payments to you must be made on at least an annual basis.

OR

2. Must be for a term of life expectancy or 15 years, but only if the annuitant is of age pension age or older and have the following characteristics:

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Allocated Pensions

An allocated pension is a regular income stream that can be purchased with superannuation monies. Unlike annuities, with an allocated pension you undertake the investment risk and have your own identifiable account balance (which is not guaranteed to last for any expected period of time). In fact, the level of your account balance will be determined by the performance of the underlying investments in your fund, as well as the level of income that you draw.

The level of income that can be drawn from an allocated pension is defined by legislation and regulation and is dependent upon your age. Both maximum and minimum levels of income are set for each age, which can best be described by the following example. Assume that $100,000 is invested in an allocated pension by a person who is 60 years old. This person would be required to draw a pension of at least $5,656 per year but would not be able to draw a pension of more than $11,111 per year. This means that any level of pension could be taken as long as it was between these two amounts. If on the other hand the person was 65 years old the minimum pension would be $6,173 and the maximum pension $12,346.

It is possible to have quite a large degree of control over an allocated pension and to vary the frequency of pension payments from monthly through to annually. In addition, investors are able to select the individual investments that go to make up their allocated pension account. In fact, you can construct a fully diversified investment portfolio using a range of different investments, with different financial institutions all within a single allocated pension account.

As mentioned in the taxation section, allocated pensions are an extremely tax effective investment structure which can pay you significant amounts of tax free income each year.

Under current legislation, you can make lump sum withdrawals from allocated pension funds at any time. These withdrawals are Eligible Termination Payments and taxed in the same way as other withdrawals from the superannuation system as described below. It is important to realise that even though it is permissible to make lump sum withdrawals from allocated pension funds at this time, it is possible that restrictions may be placed upon such withdrawals in the future.

For this reason, we strongly recommend that you regard any funds invested in allocated pensions as lifetime income streams and therefore not available for lump sum withdrawal in the future.

In the event of the death of the allocated pensioner, the account balance can be paid to either the estate or to a nominated beneficiary. Alternatively, the account balance can be used to pay a new allocated pension to a nominated person.  

Contact us:  superannuation@directadvisers.com.au

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