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Learn more about superannuation

Superannuation is the payment made regularly to a fund which can be accessed during retirement. Though only a small percentage of your income is contributed to your super fund every pay cycle, this adds up over time to create a nest egg by the time you reach retirement.

How much superannuation you need to retire depends on the kind of retirement lifestyle you have in mind, but what is clear is that the more you have in your superannuation fund, the more financially comfortable your retirement should be.

This is why some Australians choose to make voluntary super contributions on top of the minimum of 9.5 per cent of total income contributed to their superannuation fund by their employer.

The basics of self-managed superannuation funds

Self-managed super funds are similar to super funds managed by financial institutions and professional investment managers in that they are funds where you keep, and from which you can invest, your savings.

The main difference, however, is that self-managed super funds are not managed by professional investment managers – instead, they are private superannuation funds which are regulated by the ATO and managed independently by you.

If you opt to set up a self-managed super fund, you are responsible for all decisions relating to the fund, and are expected to be compliant with the laws governing super funds. Self-managed super funds allow for up to four members who must all be trustees, and the fund’s sole purpose must be to providing for the retirement of members.

Here, in the words of ASIC, the financial services regulator, is what you must do if you run a self-managed super fund:

  • Carry out the role of trustee or director, which imposes important legal obligations on you
  • Set and follow an investment strategy that is appropriate for your risk tolerance and is likely to meet your retirement needs
  • Have the financial experience and skills to make sound investment decisions
  • Have enough time to research investments and manage the fund
  • Budget for ongoing expenses such as professional accounting, tax, audit, legal and financial advice
  • Keep comprehensive records and arrange an annual audit by an approved SMSF auditor
  • Organise insurance, including income protection and total and permanent disability cover for super fund members
  • Use the money only to provide retirement benefits

Should I start a self-managed super fund?

It is recommended you conduct thorough research, evaluate your financial position and seek professional advice before committing to starting a self-managed super fund.

Maintaining a self-managed super fund is likely to require a lot of time and specific financial knowledge and skills, so it might be beneficial to speak to professionals before setting up a self-managed super fund.

They might be able to help you consider the pros and cons of running a self-managed super fund, guide you through the administration requirements and assist with investment decisions as well.

The right professionals

As with most financial decisions, working with the right professionals could be beneficial to you and all trustees. Professionals you approach could include:

  • An accountant, for assistance with the fund’s accounts and operating statements
  • A tax agent, for assistance with logging returns and tax advice
  • A fund administrator, for assistance with the running of your fund
  • A legal practitioner, for legal advice and assistance with your fund’s trust deed.
  • A financial adviser, for assistance with preparing and executing investment strategies.

It’s important to note that even if you choose to approach the above professionals for help, you will still be responsible for ensuring all tasks are completed correctly and adhere to legislation surrounding self-managed super funds.

Setting up a self-managed super fund

According to the Australian Taxation Office (ATO), there a several steps that must be taken when setting up a self-managed super fund. Appointing professionals for assistance are among the most crucial. Once this has been done, the following steps should be taken:

  • Choosing individual trustees or a corporate trustee: Self-managed super funds can have up to four individual trustees, or a company acting as a trustee. Costs, requirements and ownership of assets will differ for each of the above options.
  • Creating the trust and trust deed: The trust deed is the legally binding document which details the arrangements relating to the trust and its beneficiaries, and how the fund is operated. It is a legal document, so it must be prepared by someone who is qualified to do so, and must be agreed upon and signed by all trustees.
  • Appointing your trustees: All trustees must submit their consent in writing, and sign a trustee declaration which provides confirmation of understanding of all associated duties and responsibilities. Eligibility criteria applies to anyone hoping to be a trustee.
  • Checking your fund is an Australian super fund: It must be so for the entire financial year to be a complying super fund. If this is not the case, associated assents and income will be taxed at the highest marginal tax rate.
  • Registering your fund: Your self-managed super fund must be registered with the ATO. During the registration process, you can apply for a TFN, ABN and register for GST if you feel necessary.
  • Setting up a bank account for your fund: This is necessary to pay the fund’s expenses and liabilities.

Investments

Though it could be tempting to start making investments right away, preparing an investment strategy for your self-managed super fund could be beneficial to you and all trustees in the long run.

This strategy should be reviewed regularly and amended to suit changes in income, personal circumstances, diversification plans, the liquidity of the fund’s assets and the find’s ability to pay benefits when members reach retirement.

Importantly, the sole purpose test must be met for self-managed super funds to be eligible for the tax concessions generally available to super funds. That is, the fund must be maintained for the sole purpose of being used during the retirement of the member or members, and investments made should reflect this purpose.

The ATO does specify some restrictions to investments, such as:

  • The purchase and sale price of assets must reflect market value
  • The fund cannot borrow money (except in certain limited circumstances)
  • Assets cannot be bought from, and money cannot be loaned to, fund members (except in certain limited circumstances)

How to close a self-managed super fund

Requirements specified in the trust deed will have to be met and benefits must be dealt with before closing a self-managed super fund.

Once this is done, appointing an SMSF auditor is recommended, to complete the final audit for the fund.

Then, the final annual return should be lodged, and outstanding tax and expected liabilities settled before closing the fund’s bank account and winding up the self-managed super fund.

Pros and cons

Setting up a self-managed super fund will give your more control over your investments and how you buy and sell assets, giving you the chance to try to outperform traditional superannuation funds.

That being said, they generally involve high set-up costs and annual running expenses, so a large superannuation balance would be necessary for the fund to be cost-effective. Also, they require a level of financial expertise that a lot of people don’t have.

Alternatives

If you feel a self-managed super fund isn’t the best option for you, consider opting for an industry super fund or one managed by a financial institution or private company.

Frequently asked questions

How do I set up an SMSF?

Setting up an SMSF takes more work than registering with an ordinary superannuation fund. 

An SMSF is a type of trust, so if you want to create an SMSF, you first have to create a trust.

To create a trust, you will need trustees, who must sign a trustee declaration. You will also need identifiable beneficiaries and assets for the fund – although these can be as little as a few dollars.

You will also need to create a trust deed, which is a document that lays out the rules of your SMSF. The trust deed must be prepared by a qualified professional and signed by all trustees.

To qualify as an Australian superannuation fund, the SMSF must meet these three criteria:

  • The fund must be established in Australia – or at least one of its assets must be located in Australia
  • The central management and control of the fund must ordinarily be in Australia
  • The fund must have active members who are Australian residents and who hold at least 50 per cent of the fund’s assets – or it must have no active members

Once your SMSF is established and all trustees have signed a trustee declaration, you have 60 days to apply for an Australian Business Number (ABN).

When completing the ABN application, you should ask for a tax file number for your fund. You should also ask for the fund to be regulated by the Australian Taxation Office – otherwise it won’t receive tax concessions.

Your next step is to open a bank account in your fund’s name. This account must be kept separated from the accounts held by the trustees and any related employers.

Your SMSF will also need an electronic service address, so it can receive contributions.

Finally, you will need to create an investment strategy, which explains how your fund will invest its money, and an exit strategy, which explains how and why it would ever close.

Please note that you can pay an adviser to set up your SMSF. You might also want to take the Self-Managed Superannuation Fund Trustee Education Program, which is a free program that has been created by CPA Australia and Chartered Accountants Australia & New Zealand.

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.

What are the risks and challenges of an SMSF?

  • SMSFs have high set-up and running costs
  • They come with complicated compliance obligations
  • It takes a lot of time to research investment options
  • It can be difficult to make such big financial decisions

How is superannuation regulated?

The Australian Prudential Regulation Authority (APRA) regulates ordinary superannuation accounts. Self-managed superannuation funds (SMSFs) are regulated by the Australian Taxation Office.

How do you create a superannuation account?

Before you create a superannuation account, you’ll need to check if you’re allowed to choose your own fund. Most Australians can, but this option doesn’t apply to some workers who are covered by industrial agreements or who are members of defined benefits funds.

Assuming you are able to choose your own fund, the next step should be research, because there are more than 200 different superannuation funds in Australia.

Once you’ve decided on your preferred superannuation fund, head to that provider’s website, where you should be able to fill in an online application or download the appropriate forms. You’ll need your tax file number (assuming you don’t want to be charged a higher tax rate), your contact details and your employer’s details (if you’re employed).

What is a superannuation fund?

A superannuation fund is an institution that is legally allowed to hold and invest your superannuation. There are more than 200 different superannuation funds in Australia. They come in five different types:

  • Retail funds
  • Industry funds
  • Public sector funds
  • Corporate funds
  • Self-managed super funds

Retail funds are usually run by banks or investment companies.

Industry funds were originally designed for workers from a particular industry, but are now open to anyone.

Public sector funds were originally designed for people working for federal or state government departments. Most are still reserved for government employees.

Corporate funds are arranged by employers for their employees.

Self-managed super funds are private superannuation funds that allow people to directly invest their money.

How do I change my superannuation fund?

Changing superannuation funds is a common and straightforward process. You can do it through your MyGov account or by filling out a rollover form and sending it to your new fund. You’ll also have to provide proof of identity.

What is superannuation?

Superannuation is money set aside for your retirement. This money is automatically paid into your superannuation fund by your employer.

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.

What is the age pension's assets test?

The value of your assets affects whether you can qualify for the age pension – and, if so, how much.

The following assets are exempt from the assets test:

  • your principal home and up to two hectares of used land on the same title
  • all Australian superannuation investments from which a pension is not being paid – this exemption is valid until you reach age pension age
  • any property or money left to you in an estate, which you can’t get for up to 12 months
  • a cemetery plot and a prepaid funeral, or up to two funeral bonds, that cost no more than the allowable limit
  • aids for people with disability
  • money from the National Disability Insurance Scheme for people with disability
  • principal home sale proceeds you’ll use to buy another home within 12 months
  • accommodation bonds paid on entry to residential aged care
  • any interest not created by you or your partner
  • a Special Disability Trust if it meets certain requirements
  • your principal home, if you vacate it for up to 12 months
  • granny flat rights where you pay more than the extra allowable amount

For full pensions, reductions apply when your assessable assets exceed these thresholds:

Category

Home owners

Non-home owners

Singles

$253,750

$456,750

Couples living together

$380,500

$583,500

Couples living apart due to ill health

$380,500

$583,500

Couples with only one partner eligible

$380,500

$583,500

For part pensions, reductions apply when your assessable assets exceed these thresholds:

Category

Home owners

Non-home owners

Singles

$550,000

$753,000

Couples living together

$827,000

$1,030,000

Couples living apart due to ill health

$973,000

$1,176,000

Couples with only one partner eligible

$827,000

$1,030,000

For transitional rate pensions, reductions apply when your assessable assets exceed these thresholds:

Category

Home owners

Non-home owners

Singles

$503,250

$706,250

Couples living together

$783,000

$986,000

Couples living apart due to ill health

$879,500

$1,082,500

Couples with only one partner eligible

$783,000

$986,000

How much superannuation do I need?

According to the Association of Superannuation Funds of Australia (ASFA), here is how much you would be able to spend per week during retirement:

Lifestyle Singles Couples
Modest $465 $668
Comfortable $837 $1,150

Here is the superannuation balance you would need to fund that level of spending:

Lifestyle Singles Couples
Modest $50,000 $35,000
Comfortable $545,000 $640,000

These figures come from the March 2017 edition of the ASFA Retirement Standard.

The reason people on modest lifestyles need so much less money is because they qualify for a far bigger age pension.

Here is how ASFA defines retirement lifestyles:

Category Comfortable Modest Age pension
Holidays One annual holiday in Australia One or two short breaks in Australia near where you live Shorter breaks or day trips in your own city
Eating out Regularly eat out at restaurants. Good range and quality of food Infrequently eat out at restaurants. Cheaper and less food Only club special meals or inexpensive takeaway
Car Owning a reasonable car Owning an older, less reliable car No car – or, if you do, a struggle to afford the upkeep
Alcohol Bottled wine Casked wine Homebrew beer or no alcohol
Clothing Good clothes Reasonable clothes Basic clothes
Hair Regular haircuts at a good hairdresser Regular haircuts at a basic salon Less frequent haircuts or getting a friend to do it
Leisure A range of regular leisure activities One paid leisure activity, infrequently Free or low-cost leisure activities
Electronics A range of electronic equipment Not much scope to run an air conditioner Less heating in winter
Maintenance Replace kitchen and bathroom over 20 years No budget for home improvements. Can do repairs, but can’t replace kitchen or bathroom No budget to fix home problems like a leaky roof
Insurance Private health insurance Private health insurance No private health insurance

How does the age pension work?

Most Australians who are of retirement age can qualify for the age pension. However, depending on the size of your assets and post-retirement income, you might be entitled to only a reduced pension. In some instances, you might not be entitled to any pension payments.

How do you access superannuation?

Accessing your superannuation is a simple administrative procedure – you just ask your fund to pay it. You can access your superannuation in three different ways:

  • Lump sum
  • Account-based pension
  • Part lump sum and part account-based pension

However, please note that your superannuation fund will only be able to make a payout if 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

The preservation age has six different categories:

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60

There are also seven special circumstances under which you can claim your superannuation:

  • Compassionate grounds
  • Severe financial hardship
  • Temporary incapacity
  • Permanent incapacity
  • Superannuation inheritance
  • Superannuation balance under $200
  • Temporary resident departing Australia

Is superannuation paid on overtime?

As the Australian Taxation Office explains, there are times when superannuation is paid on overtime and times when it isn’t.

Here is the ATO’s summary:

Payment type Is superannuation paid?
Overtime hours – award stipulates ordinary hours to be worked and employee works additional hours for which they are paid overtime rates No
Overtime hours – agreement prevails over award No
Agreement supplanting award removes distinction between ordinary hours and other hours Yes – all hours worked
No ordinary hours of work stipulated Yes – all hours worked
Casual employee: shift loadings Yes
Casual employee: overtime payments No
Casual employee whose hours are paid at overtime rates due to a ‘bandwidth’ clause No
Piece-rates – no ordinary hours of work stipulated Yes
Overtime component of earnings based on hourly-driving-rate method stipulated in award No

What should I know before getting an SMSF?

Four questions to ask yourself before taking out an SMSF include:

  1. Do I have enough superannuation to justify the higher set-up and running costs?
  2. Am I able to handle complicated compliance obligations?
  3. Am I willing to spend lots of time researching investment options?
  4. Do I have the skill to make big financial decisions?

It’s also worth remembering that ordinary superannuation funds usually offer discounted life insurance and disability insurance. These discounts would no longer be available if you decided to manage your own super.

Can I carry on a business in an SMSF?

SMSFs are allowed to carry on a business under two conditions.

First, this must be permitted under the trust deed.

Second, the sole purpose of the business must be to earn retirement benefits.

What age can I withdraw my superannuation?

You can withdraw your superannuation (or at least some of it) when you reach ‘preservation age’. The preservation age is based on date of birth. Here are the six different categories:

Date of birth Preservation age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 1 July 1964 60

When you reach preservation age, you can withdraw all your superannuation if you’re retired. If you’re still working, you can begin a ‘transition to retirement’, which allows you to withdraw 10 per cent of their superannuation each financial year.

You can also withdraw all your superannuation once you reach 65 years.

When is superannuation payable?

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

What are concessional contributions?

Concessional contributions are pre-tax payments into your superannuation account. The payments made by your employer are concessional payments. You can also make concessional contributions with a salary sacrifice.

How do you set up superannuation?

Before you set up a superannuation account, you’ll need to check if you’re allowed to choose your own fund. Most Australians can, but this option doesn’t apply to some workers who are covered by industrial agreements or who are members of defined benefits funds.

Assuming you are able to choose your own fund, the next step should be research, because there are more than 200 different superannuation funds in Australia.

Once you’ve decided on your preferred superannuation fund, head to that provider’s website, where you should be able to fill in an online application or download the appropriate forms. You’ll need your tax file number (assuming you don’t want to be charged a higher tax rate), your contact details and your employer’s details (if you’re employed).