Superannuation In Australia
You’ve probably heard of the term ‘superannuation’ or ‘super’ when you’re out with your friends or at a family get-together, but what does it all really mean? And why should YOU be interested in it? Well, this quick 5-minute read can help you figure that out.
In simpler terms, superannuation is your money. Money which you build up over the course of your working life by making small but significant contributions out of your own remunerations. These savings will help sustain your life after work i.e, after retirement.
Why is it important?
We thought you might ask that. The answer simply is that the Age Pension is just not ample enough! Even though the Australian Government does offer an Age Pension to all eligible individuals, it may fail to meet all your requirements. You’d most definitely need some way of killing your time once you’re past your working life. You might take interest in some old hobby of yours, or maybe you might wanna enrol in classes of some sort to polish some skills of yours, or anything! All these activities require money to fund them, for which your Age Pension might not prove to be enough.
As the Australian population ages and the median age increases, the impact on Government-funded pensions would likely turn out to be more severe in the upcoming years, which in turn would hurt the Australian economy, as a whole. To prevent and minimize the damage, and lessen the burden on the public budget, it’s better to carefully examine and opt for the best superannuation plan in order to ensure a better healthy work-free life ahead.
What are its benefits?
One big reason why one would wanna invest is because of its concessions and exemptions against certain taxes. Let’s not kid ourselves and be truthful, as a species, we are poor savers. Usually, savings for retirement never really top our priority list. Most people don’t even give a single thought to their retirement plans until much later in life, even though they can start chalking out a plan and begin contributing to their superannuation from the day they receive their first cheque. So, in order to convince people to put a bit of their money aside, the Australian Government came up with certain incentives and reduced taxes for those who actively invest in their superannuation consistently. Generally speaking, any contribution that you make (up to certain caps) and any investment earnings on your superannuation balance are taxed at a maximum of 15%. This rate may be lower than your personal marginal tax rate.
Your superannuation is money put aside to sustain your life after your infirmity – your savings. Superannuation is a long term investment to which you contribute over the course of your working life, so every dollar you put in makes a huge difference! Most superannuation funds won’t let you get access to, or withdraw your super money unless and until you meet one of these criteria:
- Retire from the workforce
- Reach preservation age
Preservation age is:
- 55 for people born before 1 July 1960
- 60 for people born before 30 June 1964
What are Contributions Cap?
The Australian Superannuation and taxation systems are set up to provide tax reliefs and allowances to people who contribute to their super while working. However, there is a limit on the concessions and incentives you can claim. Basically, if you contribute money to your super funds in a short amount of time, then you may have to pay extra taxes and charges. Contributions Cap differs based on the person’s age, salary, and what type of contributions they’ve made.
How exactly is my super taxed?
We’re glad you asked this. Money paid into your super account is taxed at 15%. These are known as salary-sacrificed contributions i.e., concessional contributions. However, there are some exceptions to this rule:
- If you earn $37,000 or less, the tax is reimbursed back into your super account through the low-income super tax offset (LISTO).
- If your income and super contributions combined are more than $250,000, you pay Division 293 tax, an extra 15%.
- If you make your contributions through your net income (which has been taxed already), also called non-concessional contributions, then you don’t need to pay any more tax afterwards.
How are my super withdrawals taxed?
Simply put, the taxation on withdrawals depends on how you withdraw your super funds. Traditionally, it’s done either as:
- A Super Income Stream
- A Lump Sum
Super Income Stream
A Super Income Stream is a method of withdrawal of money as small regular payments over a long course of time.
- For people above the age of 60, this process will be tax-free.
- People below the age of 60 may need to pay taxes on this.
A Lump Sum
Different from the Income Stream, a Lump Sum allows you to withdraw large amounts of money at a time.
- For people above the age of 60, this process will be tax-free if they withdraw from an already taxed super fund.
- People below the age of 60 trying to withdraw Lump Sum don’t need to pay taxes if they withdraw up to the low rate threshold (currently $225,000).