The basics of superannuation
Superannuation was most likely your first experience in investments as a young person with an income. This may mean your super has been overlooked or left unchecked as you accumulate debt, wealth and find new investments. It also means you may not have been educated on the basics of superannuation and how getting it right early can grow your savings for retirement.
Let’s get the basics right first!
What is superannuation?
Superannuation is a pre-tax amount of money that your employer pays into a super fund for you. The superannuation fund then invests this money on your behalf with the intention to grow your investment in the future. Essentially, super is savings for your retirement and an important part of your financial plan for the future.
Click here for our cheat sheet on getting your superannuation sorted from the start.
Who earns super?
Generally, you earn super if you’re:
age 18 years or over and earn $450 or more (before-tax) in a calendar month, or
under age 18 years, earn $450 or more (before-tax) in a calendar month, and work more than 30 hours in a week.
How much super should I get?
Your employer needs to pay at least 9.5% of your before-tax earnings into a super fund on your behalf. This amount is on top of your earnings and adds to your overall salary.
Some workplaces may have an agreement in place that will provide higher rates of super contributions above the 9.5% minimum.
Example:
You earn $5,000 in a month before tax. Your employer needs to pay an extra 9.5% ($475) into a super fund for you.
How will my superannuation balance increase?
While you’re working, your super balance will grow through:
- contributions from your employer
- extra amounts you (or your spouse) put into your account
- any government boosters you’re eligible for
- transfers from other super funds
- positive investment returns (money earned on the investments we make on your behalf)
- Regular deductions and things that will reduce your super balance are:
- contributions tax that’s payable when money goes into your super account
- fees we charge for managing your account
- insurance fees (if you have cover with us)
- transfers to other super funds
- negative investment returns
What are the tax benefits of super?
Super can be a tax-effective way to invest in your future when you have the right tools and strategies implemented to reap the benefits.
How is money paid into super taxed?
Money paid into super from your before-tax salary (before-tax contributions) is taxed at 15%. This includes super paid by your employer, salary sacrifice amounts, and any personal contributions you claim as a tax deduction.
The tax you pay on money going into your super account is generally much lower than the tax you pay on your regular income. This is why some choose extra super contributions as a tax-effective strategy.
Example:
Your employer pays $475 into super for you — $71.25 goes to contributions tax and $403.75 goes into your account.
If you earn more than $250,000 in a financial year (including super), you may have to pay an additional 15% tax on some or all of your before-tax contributions.
You do not pay any tax on money paid into super from your after-tax salary (after-tax contributions). This includes voluntary payments you make directly into your account via BPAY®.
How are investment earnings in super taxed?
Your super is invested in one or a mix of investment options with the aim of growing your savings through investment returns.
Investment returns are taxed at up to 15%, depending on which option you've invested in. This is generally less tax than you’d pay on investment earnings outside of super.
Our advisors at Financial Streams can help you choose the right investment option for your super and work towards a healthy retirement. Get in touch with us today.
Want to dive deeper into superannuation fundamentals? Check out the video below with Andrew and Michael.
