Back to basics: superannuation | How to take advantage
One of the most commonly misunderstood areas of finance is superannuation.
People from many walks of life simply do not understand the basic concepts of superannuation, likely because it’s not something we learn about at school.
Back to basics: superannuation
As a young person it seems an awfully long way away to really worry about.
The problem with this is by the time you start to wonder about it and learn more, you’ve left it a little late to take full advantage of it.
Simply put, our superannuation system is in place to force retirement savings for all working Australians. Employers must contribute 9% on top of your salary into your chosen superannuation fund at least each quarter. Essentially, you can’t withdrawn this money until you retire.
The most important thing to understand is that superannuation itself is not an investment.
Superannuation refers to the environment under which you hold your retirement savings. You can actually invest in the same types of investments that you may hold in your personal name (cash, term deposits, managed funds, shares, property, etc), depending on your chosen fund and the options that are available to you.
The key difference is that any income (interest, dividends, rent) received on the investments held within your superannuation fund, is only taxed at a flat rate of 15%.
Any investment income you receive from assets held in your personal name you need to include in your annual tax return. They will be taxed at your marginal tax rate (MTR) which could be as high as 46.5%.
While we’re on the topic of tax, there are also differences in capital gains tax (CGT) if you sell an investment within your superannuation fund and make a gain.
If you have held the investment for over 12 months, the effective CGT rate payable is only 10%. Whereas a gain made on a personal asset sold after 12 months is discounted by 50% and then taxed at your MTR. This could be as high as 23.25%.
Getting money in
Now that you understand the favourable tax rates associated with your investments held within your superannuation, you’re probably starting to understand how powerful the superannuation environment can be for building wealth.
The problem then lies with getting money in. Unfortunately, you cannot simply contribute an unlimited amount of money into your superannuation fund. There are two types of contributions you can make, concessional and non-concessional.
Concessional contributions refers to pre-tax contributions made into your fund from your salary, prior to paying any tax. The 9% your employer contributes are concessional contributions, and any salary sacrifice you make also falls into this category. These contributions are taxed on entry to the fund at a flat rate of 15%. You are limited to a maximum of $25,000 per year.
Non-concessional contributions refers to tax-paid contributions that are made into your fund from your savings or income received after tax has already been deducted. This money has already been taxed by your employer when you received it. Because of this, there’s not tax on these contributions on entry to the fund. You can contribute up to $150,000 per year.
As you can see, superannuation can be a very powerful wealth building tool.
Not to mention it is completely untouchable by creditors in the unfortunate event of bankruptcy or legal proceedings.
In summary, a couple of points to remember below:
- can invest in any type of asset
- cannot withdraw until retirement
- employer must contribute 9% at least qtly
- income taxed at a flat rate of 15%
- CGT taxed at a rate of 10% if held for more than 12 months
- concessional (pre-tax) limit is $25,000 per year
- non-concessional (after tax) limit if $150,000 per year
Need some help making the most of your super? Our Financial Coaches LOVE helping members with their goals and working out how to attach money to them. To chat goals with one of the WE team, book in a time for a Free Strategy Session.
Disclaimer: Information contained within this article is of a general nature. Do not be rely upon it when making financial decisions. Please consult a professional financial advisor or planner (like us!) before acting.