You’ve heard the term in the news, you’ve seen it on your payslip, but what exactly is superannuation and why should you care about it?
Put simply, superannuation is money that’s set aside while you’re working for you to live on when you retire from work. It’s a way of saving for your retirement. Your employer must pay a percentage of your earnings into your super account, and your super fund invests the money until you retire.
There are two important phases the lifecycle of your super fund: the Accumulation Phase and the Pension Phase. This is what happens during each stage:
This is essentially the period where you’re building up your superannuation. Here are the key features:
1. Contributions: During this phase, you or your employer (or both) make contributions to your super fund. These can be concessional (before-tax) contributions, like compulsory employer contributions and salary sacrifice, or non-concessional (after-tax) contributions.
2. Investment growth: Your super fund invests this money in a range of assets. The objective is to grow your retirement savings through investment returns, which are typically reinvested.
3. Tax benefits: The Accumulation Phase offers tax advantages. Investment earnings are taxed at a maximum rate of 15%, significantly lower than personal income tax rates. Capital gains are taxed at maximum of 15% or only 10% if the asset is held for more than 12 months.
The Pension Phase begins when you decide to retire and start drawing an income from your superannuation. Here's what you need to know:
1. Transition to retirement: You don't necessarily need to be fully retired to enter this phase. Transition to Retirement (TTR) pensions allow you to access some of your super while still working once you reach your preservation age.
2. Income streams: In the Pension Phase, you can draw regular payments from your super. This provides you with an income stream during retirement.
3. Tax benefits: The tax benefits become even more significant. For individuals over 60, the income from the pension is generally tax-free. Additionally, earnings on investments in this phase are also tax-free.
The main difference between the two stages is that during the Accumulation Phase, the priority is on growing and building your wealth, while during the Pension Phase, it’s about effectively managing and using that wealth.
There are different tax treatments in each phase, with the Pension Phase having more tax advantages, especially for those over 60.
The other important difference is that during the Accumulation Phase, access to your super funds is generally restricted until you meet a condition of release. In contrast, the Pension Phase offers regular access to funds as income, and even lump sums if you need them.
It’s important to note that this transition from Accumulation Phase to Pension Phase doesn't automatically occur, and you need to proactively nominate your super fund to convert to pension. You may otherwise unknowingly be continuing to pay tax on your superannuation investments long after it could have been converted to a tax-free pension.
We hope this has helped answer some questions you may have had about superannuation. It can be a tricky topic, so please call us on (02) 9739 6555 if you’d like to speak with one of our expert Financial Advisers about your superannuation and how to best save for retirement.
Please note, the above information does not constitute financial advice and does not take into account your current circumstances or goals. Please speak with a financial adviser before acting on any information found here or throughout the 5 Financial website.