A wealth creation platform ideal for retirement income
Superannuation has been designed to encourage you to provide for your own retirement. There is nothing magical about the investments that a super fund can have. You can invest in the same sorts of things outside of superannuation. But the tax benefits are unique.
Superannuation tax benefits increase your retirement benefits
- Your employer makes payments into your super fund without either you or the employer having to pay tax on them
- You may be able to make additional tax-deductible contributions to your superannuation fund, given that you are under the $25,000 limit, which includes your employer's pre-tax contributions for you as well as the personal contributions that you claim a tax deduction for.
- A superannuation fund's earnings are only taxed at 15% no matter what the member's own marginal tax rate happens to be.
- When the superannaution fund is converted into a superannuation pension in retirement, it pays no tax on its earnings, and the payments to you are tax free.
Cautions about superannuation planning
- Laws concerning superannuation are constantly changing. In recent years many of those laws involve limiting how much can be paid into superannaution in a given year. That means that it is unlikely that you will be able to instantly move a large amount into superannuaton just before retirement. You need to be working on that over the long term.
- Don't think that just because the government has mandated that an employer pay 9.5% of an employee's wage into super, that it will be enough to retire on. Most people will find that they need considerably more.
- While fees charged by a superannuation fund will have an impact upon the retirement benefits, the investment performance, or lack thereof, can have an even greater impact.
Advice for your superannuation investing
It's a wise move to get some advice on your superannuation. We would be happy to examine your present superannuation fund and strategies in light of your retirement objectives. This involves researching the characteristics of your present fund, and comparing it with several retail funds that have a wide range of investment options. Our recommendations are based on your own personal needs and objectives, with a recommendation to either stay with your existing fund or change to one if we believe that is in your best interest. The cost to do that isn't much more than what is often paid by a person each year getting their car serviced. And this is something that is likely to benefit you for decades to come.
Should I hold life insurance in my super fund?
Holding life insurance (death cover) in a superannuation fund has some advantages for some people, but it's not the best for everyone. So, why might you want to have your life insurance in your superannuation fund?
- Insurance premiums may effectively be tax deductible. That would normally not be the case with life insurance outside of superannuation.
- During brief times when cash flow is tight, insurance cover may be maintained when the family budget would otherwise not allow it.
- Low cost insurance is often available through a superannuation fund.
Those sound like pretty good reasons to have your insurance is super. What would keep one from wanting it that way?
- Insurance premiums paid by your super fund will decrease what is available at retirement. And it's easy to loose track of how much damage they are doing. They might not seem like much at the start, but if it's a stepped premium, it will go up with your age - quite dramatically so as you get older. And they all add up -- or subtract!
- Your insurance beneficiaries are limited to those allowed for your superannuation fund. That's basically your estate, a current spouse, your children or a financial dependent.
- If the benefit is paid to an adult who is not your spouse, that payment is taxed. Outside of superannuation it would not be.
- The nature of benefits is somewhat limited in super. Outside of superannuation, ancilliary benefits can be added that are not allowe in superannuation.
This discussion has just been about life insurance - death cover. When you get into insurance involving disability there are even more vital differences.
What is superannuation?
Superannuation in Australia is a government legislated means of providing a retirement income for workers, funded by employers and the workers themselves. How do they manage to get them to agree to do that? Partly by requiring employers to pay 9.5% of the worker's wages into an acceptable superannuation fund, and partly by providing tax concessions to make it very worthwhile for the workers to add more to it.
The legislated employer contributions are known as "superannuation guarantee contributions" (SGC). The worker doesn't have to pay tax on those, and they are an expense to the employer, so they are a tax deduction for him. The super fund that receives them pays 15% tax on those contributions. At the present time, a maximum of $25,000 per year may be contributed in this way, and what the employer pays can be added to by the worker. That can be either through "salary sacrifice" superannuation contributions, or by "personal contributions" for which the worker will claim a tax deduction.
When a worker retires over the age of 60, he or she may have their superannuation account converted into a pension. That pension can pay them a tax free income stream, and the worker can request tax free lump sum payments from his or her superannuation account. Earnings on the investments within the pension are also tax free.
Such concessions motivate workers to utilise superannuation the best they can, and that in turn reduces how much the government has to pay in age pension benefits. It's a mutually beneficial system.
Should TPD insurance be held in superannaution?
There are significant issues holding total permanent disability in superannuation, but with the right sort of fund they can be avoided. Consider the following:
- Superannuation law requires that TPD has an "any occupation" definition of total disability. That means essentially that doctors agree that you will never, ever be able to get any job whatsoever. Outside of super you can get an "own occupation" definition, which is that you would never be able to work at your own occupation again. That's much easier to claim.
- Any type of disability insurance has a lot of nuiances in policy wording. A careful examination of policies reveals a very wide variation in policy quality. Industry funds will typically have policies stripped down to the very basics. The policies provided by the same insurer through a retail fund will typically have much better policy wording. And those words translate to a greater liklihood of receiving a payout in a given situation.
So, how can this problem be avoided, and still utilise superannuation?
- Essentially it involves using a split policy. The part of the insurance that can fit into the constraints of superannuation are owned by the super fund trustee. A separate, but connected policy is owned by the member. That policy covers whatever is not allowed in superannuation. You end up with the same cover as what you would have with a policy outside of superannuation, but you still get the benefits of having the bulk of it paid by your super fund.
There is one other drawback to consider:
- While you are able to get a tax concession on the premium payments, if you have a claim, you are likely to have to pay something on the order of 20% tax on the payout.
How much of a problem is that?
- If you are claiming a tax deduction on your super contributions used to pay the premiums, chances are that you are saving more than 20% tax on those premiums (dependent upon your marginal rate being more than 35%). Hopefully you will never make a claim, and you will be ahead. If you do make a claim, then you pay the tax, but you should allow for that in determining the insurance amount.