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What's so good about super?
With all the fuss the Government makes about superannuation, we sometimes forget that it is just one form of saving. There's nothing stopping you saving outside the superannuation system and you will still have access to the same range of investments including shares, property, unit trusts, bank accounts, term deposits, insurance bonds, antiques, rare coins or ostrich farms.
What are the advantages of super over other investments?
Firstly, you know it will be there
There are two major differences between investing inside or outside the superannuation system. Firstly, if you invest outside the system say, in a bank account, you can withdraw all or part of it at any time. Superannuation savings, however, can generally not be accessed until you retire after you reach your preservation age (ranges from 55 to 60 depending on your date of birth).
Secondly, it's tax advantaged
The second difference is the tax treatment. A special concessional rate of tax applies to superannuation funds which, in most cases, is much lower than the marginal tax rate you have to pay on the interest earned from a bank account.
Thirdly, your employer has to contribute too
One of the most appealing features of superannuation is employer contributions. In fact, the bulk of your superannuation is probably made up of employer contributions, which means that you're already in a good position for your retirement.
You might add a few other comments about super, namely that it's confusing, constantly changing, complex, restrictive and loaded with fees. But believe it or not, the Government is on the right track with a compulsory super system. Australians are not good voluntary savers which is why many people own nothing at retirement except perhaps their home. And the only reason they own their home is because the bank would have taken it away had they not kept up their repayments!
Despite all the criticism, voluntary and compulsory super is good. It represents regular saving, it's tax-efficient, it's generally invested in good quality long-term assets (shares, property and fixed interest) and the fact that, like your house, you usually can't get your hands on the cash is a huge plus. Superannuation should be a vital part of your long-term financial plan.
What do you really need to know?
On superannuation, if you strip away the legislative detail, there are really only a handful of key issues you need to understand.
How much do you have already?
Your annual statement will show you the amount you have already contributed to super. Remember that unless you have consolidated your superannuation accounts over the years, each time you started a new job you would have probably started a new superannuation account. It's quite possible that you have multiple amounts in different superannuation funds. If this is the case the best thing you can do is to consolidate your super where possible. This helps you save fees and it's easier to keep track of how your super account is progressing.
How much is enough?
Circumstances will vary greatly among individuals but generally speaking 75 per cent of your pre-retirement income is the recommended amount.
How can you make up the difference?
Assuming there is a shortfall between the amount you should be contributing to superannuation and the amount you are actually contributing, you probably want to know how to bridge the gap.
There are two answers to this important question. The first is to increase your contributions and the second is to maximise the returns you are receiving from the amount you already have accumulated. A combination of both of these is naturally the best way to ensure your nest egg at retirement will be enough.
1. Increase your contributions
The advantage of topping up your superannuation is that you will be saving in a concessionally taxed environment. At present, for most people the tax paid in respect of superannuation is less than that paid in non-superannuation alternatives. This means that the net returns for your super will be higher.
There are two ways of putting money into super. Firstly, your employer will contribute an amount on your behalf. This is presently 9.5 per cent.
The second way of accumulating super is to make contributions of your own. This may be through salary sacrifice or by making non-concessional contributions (ie with pre-tax income). Salary sacrifice means that you choose to receive less salary and have that amount credited to your super. The advantage of this is that the tax on contributions is paid at the maximum rate of 15 per cent rather than your current tax rate. At the end of the day you increase your investment by paying less tax.
If salary sacrifice arrangements are not available, you will have to pay superannuation contributions with after-tax money. These are called non-concessional or undeducted contributions because they have not, or cannot, be claimed as a tax deduction.
2. Increase your returns
By ensuring that your money is invested in a way that suits your needs for either growth or for security of your capital, you are maximising your chances of bridging the retirement gap. This is the gap between how much money you have now, and how much you will ultimately need to fund a comfortable retirement.