Recently I have been in discussions about superannuation contributions. And I think some information needs to be spread out to help you in building a stable retirement.
- Employer must contribute super for their employees, minimum of 9.5% of the gross salary per annum.
- The amount of contribution is taxed inside super account at 15%.
- You can voluntarily contribute more money into super and take advantage of the low tax break, however it will only be at maximum of $25,000 per annum, including the amount contributed from employer.
- You can contribute to previous financial years, starting from FY 2019.
- There are ways to access super to buy assets before reaching 65, mainly via SMSF.
What is super?
Superannuation, or Super in short, is the money put aside by the employer for you to take care of you during your retirement.
The required amount that the employer is required to contribute equals to 9.5% of your ordinary timed earnings per annum, at the minimum.
You cannot access the money inside super account until you are 65 and above, or under certain circumstances.
Why should I contribute more into super?
Since I cannot access it until I am 65, why should I contribute my hard earned money now instead of taking it to buy some investments now?
First off, you are spending money to fund your future retirement, ensuring that you have a better future.
Secondly, most super accounts have investment settings built in, and it is highly encouraged that a young individual as I am, should put all super money into high growth investments. Since I cannot pull the money out in another 30-40 years, it is reasonable that I will see some substantial return thank to compounding effect.
Thirdly, you save tax money when putting more into super.
Suppose that the tax is flat out 32.5% for simple calculation. In the case of progressive tax rate, the difference may be lower. But generally, you still save some tax money and increase your net worth better. The tax charged inside super is a flat 15%, and it is substantially lower than our tax bracket. Of course if your tax rate is smaller, this will not make sense.
How do I use my super money before retirement?
The most common way to “access” your super money before retirement is to transfer all of them into a Self-managed Super Fund (SMSF). You will be in charge of this super fund, and therefore has the right to control the money. However there are quite a lot of restrictions that come with the structure. It is best to consult with a financial advisor or an accountant to know more.
Another uncommon way is that some Superannuation company, e.g. AustralianSuper, has an investment product called Member Direct. You can subscribe to this product, and basically it allows you to buy certain shares of your choice within the scope of super. There are also some limitation of doing it this way, and you can only purchase shares.
What I am doing?
It may be best if I try to top up the maximum amount of contribution each year, and later on I may pull them out into an SMSF to purchase a property.
Let’s say I top up maximum of $25,000 per year, after 10 years I theoretically have $250,000 inside super. During that time, if the share market goes the way it has been going in the last 100 years, my investments will compound about 7% per year, leading to the final figure of around $410,829. With this figure, I should be able to purchase a property to sit inside my own SMSF and net me some healthy return.
There are a lot of interesting things when it comes to Superannuation. I just listed the most common ways to deal with it here. It is crucial to consult professionals who can advise you on the matter. However, it is good to know that there are other solutions out there, all you need to do is ask.
By Tuan Nguyen