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The cost of super complacency

 The cost of super complacency

Aussies who have a set-and-forget mentality towards their super funds could be sacrificing the retirement they deserve. The good news is that there are plenty of ways to gain and retain control over your nest egg that could lead to a happier, wealthier retirement.

From getting into a habit of comparing your super fund’s performance to making voluntary contributions into your super to boost your balance, a little bit can go a long way by the time you reach retirement age.

Sunsuper’s Head of Advice and Retirement, Anne Fuchs, said members typically become more interested in their super the closer they get to retirement, but the fund encourages them to “engage early to make informed choices about their future”.

“We’re busy, life is bumpy and for a lot of us retirement is the last thing on our minds, but it really shouldn’t be,” she said.

“Staying on top of your super, particularly around those life milestones can make a huge difference later in life.”

The happiest of returns

One of the key factors of your super fund is the investment return that it makes – also known as its performance. Even a slight variation in long term returns has the potential to make a significant impact on your super balance throughout the duration of your working life.

Case study:

Take Kate, for example. Kate is 25 years old and has just accepted her first full-time job, complete with a $60,000 p.a. salary. She understands how important it is to compare super performance, so she puts the two funds she’s interested in to the test. 

She notes that both funds charge the same fees, but Fund A’s past investment return is 8.5 per cent, while Fund B’s is 7.5 per cent.

Kate calculates that if she was to retire at age 67 with her super in Fund A and it continued to maintain its historical return, her balance could be $494,003. And if she chose Fund B and its future return continued to be 1% less, it could be $398,224.

By choosing the fund that maintained its 1 per cent higher rate of return over the long term, Kate could potentially retire with $95,779 more.

*Source: Moneysmart Superannuation Calculator – refer to its assumptions and disclaimer. Notes: Assumes a starting super balance of $0 and super guarantee contributions only.

Given super is a long-term investment, when comparing super returns, it’s important to look at the fund’s performance over the longer term (5, 10 or more years), as well as factoring in the funds’ fees and other costs. It’s also important to remember that past performance isn’t necessarily an indicator of future performance.

It's also worth doing your research on the fund's investment strategy and options offered so that you can gain an understanding of the asset classes you could be investing in, how your super could be allocated among asset class, and the fund’s approach to considering environmental, social and governance issues in its investment decisions.

“Superannuation is the longest-term investment most of us will ever have, so it is important to know who your super is with and that you’ve weighed up what investment options are right for you,” Ms Fuchs said.

“Online comparison tools can help, or you can contact your super fund.

“As a profit-for-members fund, Sunsuper has committed to building portfolios that deliver for our members over the long term, and has outperformed the industry average over the past one, three, five, seven, 10, 15 and 20 years¹.

“We also offer our members a range of digital tools and calculators, our secure online account portal, mobile app, and access to seminars, education webcasts and expert financial advice about their account for no extra cost.”

Giving a little extra

On July 1 this year, the super guarantee (SG) increased from 9.5 per cent to 10 per cent. It’s scheduled to gradually increase over the coming years until it reaches 12 per cent in 2025. However, you don’t have to wait for the next SG increase to grow your nest egg.

In addition to your employer’s contributions, you may be able to make extra contributions yourself, in the form of pre-tax super contributions or after-tax super contributions. Voluntary super contributions can significantly boost your balance over the life of your career.

There are number of different ways you can make extra contributions to your super, so it's worth exploring what might work best for you.

Here’s a look at the estimated difference contributing an extra 2 per cent could make to your super balance at retirement:

Starting age 25 years 25 years 
Starting salary $60,000 $60,000 
Starting SG 10% 10% 
Extra contributions nil 2% of salary per month 
Investment return7.5%7.5% 
Investment fee 0.85% of balance0.85% of balance 
Tax on earning7% 7% 
 Super balance at age 67 $398,224$468,310

* Source: Moneysmart Superannuation Calculator – refer to its assumptions and disclaimers. Notes: Assumes a starting super balance of $0. 

“Putting more money into your super is the equivalent of putting more sunscreen on when you’re younger, because it is so beneficial over the long term,” Ms Fuchs said.

“Additional super contributions can make an enormous difference to your quality of life in retirement. The interest paid on earnings can cause a ripple effect that gets your balance expanding over time. And you may also be able to lower your taxable income.

“The compounding nature of superannuation means that every little bit you add today will help grow your balance and be there when you stop working.”

Find out how Sunsuper could kickstart your retirement

Every little bit helps

With every little effort you contribute towards the growth of your super, the cost of complacency falls. It's helpful to know the more attention you pay to your super, the less you're likely to feel the burn.

According to Ms Fuchs, there are a variety of journeys into retirement and not all of them are totally planned. 

“Think of super as an aching tooth,” she said.

“If you continue to ignore the tooth, eventually you’ll need a root canal, or it may have to be removed. Alternatively, if you had visited the dentist for regular check-ups and cleans, you may save the tooth from even needing a filling.

“The same goes for your super. Check in on it regularly, look after it and when the time comes for retirement, you’re likely going to be in a much better position financially to enjoy the things that matter to you.” 

Find out more about how Sunsuper can grow your wealth

¹For Sunsuper for life Super-savings accounts. Source: SuperRatings Fund Crediting Rate Surveys - SR50 Balanced (60-76) Index to 30 June 2021. Past performance is not a reliable indication of future performance.

Sponsored Article

This article was sponsored by Sunsuper. While the article has been written in accordance with RateCity's editorial guidelines, the information was mainly focused on products and services offered by Sunsuper. 

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This article was reviewed by Personal Finance Editor Georgia Brown before it was published as part of RateCity's Fact Check process.

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Learn more about superannuation

What are reportable superannuation contributions?

For employees, there are two types of reportable superannuation contributions:

  • Reportable employer super contributions your employer makes for you
  • Personal deductible contributions you make for yourself

How much extra superannuation can I add to my fund?

There is an annual limit of $25,000 for concessional contributions – that is, money paid by your employer and extra money you pay into your account through salary sacrificing. There is also a limit on non-concessional contributions. Australians aged between 65 and 74 have a limit of $100,000 per year. Australians aged under 65 have a limit of $300,000 every three years.

How do you pay superannuation?

Superannuation is paid by employers to employees. Employers are required to pay superannuation to all their staff if the staff are:

  • Over 18 and earn more than $450 before tax in a calendar month
  • Under 18, work more than 30 hours per week and earn more than $450 before tax in a calendar month

This applies even if the staff are casual employees, part-time employees, contractors (provided the contract is mainly for their labour) or temporary residents.

Currently, the superannuation rate is currently 9.5 per cent of an employee’s ordinary time earnings. This is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

Employers must pay superannuation at least four times per year. The due dates are 28 January, 28 April, 28 July and 28 October.

Can I transfer money from overseas into my superannuation account?

Yes, you can transfer money from overseas into your superannuation account – under certain conditions. First, you must provide your tax file number to your fund. Second, if you are aged between 65 and 74, you must have worked at least 40 hours within 30 consecutive days in a financial year. (Australians under 65 aren’t subject to a work test; Australians aged 75 and over cannot receive contributions to their superannuation account.)

Money transferred from overseas will generally count to both your concessional contributions limit and your non-concessional contributions limit. You will have to pay income tax on the applicable fund earnings component of any money transferred from overseas. You might also be liable for excess contributions tax.

What are personal contributions?

A personal contribution is when you make an extra payment into your superannuation account. The difference between personal contributions and salary sacrifices is that the former comes out of your after-tax income, while the latter comes out of your pre-tax income.

What are reportable employer superannuation contributions?

Reportable employer superannuation contributions are special contributions that an employer makes on top of the regular compulsory contributions. One example would be contributions made as part of a salary sacrifice arrangement.

How can I increase my superannuation?

You can increase your superannuation through a ‘salary sacrifice’. This is where your employer takes part of your pre-tax salary and pays it directly into your superannuation account. Like regular superannuation contributions, salary sacrifices are taxed at 15 per cent when they are paid into the fund.

What is salary sacrificing?

A salary sacrifice is where your employer takes part of your pre-tax salary and pays it directly into your superannuation account. Salary sacrifices come out of your pre-tax income, whereas personal contributions come out of your after-tax income.

How does superannuation work?

Superannuation is paid by employers to employees, at least once every three months. The ‘superannuation guarantee’ is currently 9.5 per cent – which means that your employer must pay you superannuation equivalent to 9.5 per cent of your salary. The guarantee is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

Superannuation is generally taxed at 15 per cent. However, if you earn less than $37,000, you will be automatically reimbursed up to $500 of the tax you paid. Also, if your income plus concessional superannuation contributions exceed $250,000, you will also be charged Division 293 tax. This is an extra 15 per cent tax on your concessional contributions or the amount above $250,000 – whichever is lesser.

You can withdraw your superannuation when you meet the ‘conditions of release’. The conditions of release say you can claim your super when you reach:

  • Age 65
  • Your ‘preservation age’ and retire
  • Your preservation age and begin a ‘transition to retirement’ while still working

 

Can I buy a house with my superannuation?

First home buyers are the only people who can use their superannuation to buy a property. The federal government has created the First Home Super Saver Scheme to help first home buyers save for a deposit. First home buyers can make voluntary contributions of up to $15,000 per year, and $30,000 in total, to their superannuation account. These contributions are taxed at 15 per cent, along with deemed earnings. Withdrawals are taxed at marginal tax rates minus a tax offset of 30 percentage points.

Voluntary contributions to the First Home Super Saver Scheme are not exempt from the $25,000 annual limit on concessional contributions. So if you pay $15,000 per year into the First Home Super Saver Scheme, you have to make sure that you don’t receive more than $10,000 in superannuation payments from your employer and any salary sacrificing.

What superannuation details do I give to my employer?

When you start a job, your employer will give you what’s called a ‘superannuation standard choice form’. Here’s what you need to complete the form:

  • The name of your preferred superannuation fund
  • The fund’s address
  • The fund’s Australian business number (ABN)
  • The fund’s superannuation product identification number (SPIN)
  • The fund’s phone number
  • A letter from the fund trustee confirming that the fund is a complying fund; or written evidence from the fund stating it will accept contributions from your new employer; or details about how your employer can make contributions to the fund

You should also provide your tax file number – while it’s not a legal obligation, it will ensure your contributions will be taxed at the (lower) superannuation rate.

How do you open a superannuation account?

Opening a superannuation account is simple. When you start a job, your employer will give you what’s called a ‘superannuation standard choice form’. Here’s what you need to complete the form:

  • The name of your preferred superannuation fund
  • The fund’s address
  • The fund’s Australian business number (ABN)
  • The fund’s superannuation product identification number (SPIN)
  • The fund’s phone number
  • A letter from the fund trustee confirming that the fund is a complying fund; or written evidence from the fund stating it will accept contributions from your new employer; or details about how your employer can make contributions to the fund

You might want to provide your tax file number as well – while it’s not a legal obligation, it will ensure your contributions will be taxed at the (lower) superannuation rate.

What is the superannuation rate?

The superannuation rate, or guarantee rate, is the percentage of your salary that your employer must pay into your superannuation fund. The superannuation guarantee has been set at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

How long after divorce can you claim superannuation?

You or your partner could be forced to surrender part of your superannuation if you divorce, just like with other assets.

You can file a claim for division of property – including superannuation – as soon as you divorce. However, the claim has to be filed within one year of the divorce.

Your superannuation could be affected even if you’re in a de facto relationship – that is, living together as a couple without being officially married.

In that case, the claim has to be filed within two years of the date of separation.

Either way, the first thing to consider is whether you’re a member of a standard, APRA-regulated superannuation fund or if you’re a member of a self-managed superannuation fund (SMSF), because different rules apply.

Standard superannuation funds

If your relationship breaks down, your superannuation savings might be divided by court order or by agreement.

The rules of the superannuation fund will dictate whether this transfer happens immediately, or in the future when the person who has to make the transfer is allowed to access the rest of their superannuation (i.e. at or near retirement).

Click here for more information.

SMSFs

If your relationship breaks down, you must continue to observe the trust deed of your SMSF.

So if you and your partner are both members of the same SMSF, neither party is allowed to use the fund to inflict ‘punishment’ – such as by excluding the other party from the decision-making process or refusing their request to roll their money into another superannuation fund.

This no-punishment rule applies even if the two parties are involved in legal proceedings.

Click here for more information.

Financial consequences

Superannuation funds often charge a fee for splitting accounts after a relationship breakdown.

Splitting superannuation can also impact the size of your total super balance and how your super is taxed.

Click here for more information.