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Superannuation explained.

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What is superannuation?

Superannuation is, very simply, long term savings invested for your retirement income. Therefore, everyone who has superannuation is an investor. Most funds will have a default or balanced option to invest your super, which will almost always have some exposure to the share market.

Super is, of course, not the only way you can save for retirement. You can buy property for example or invest directly in the share market, but superannuation is different to other forms of savings.

* it is compulsory

* it is generally linked directly to your employment

* superannuation funds that hold and invest your money are regulated and subject to many rules and laws

* your superannuation money is taxed in a specific way, and

* most of the savings cannot be accessed before retirement.

Although originally only offered to some public and private sector employees, superannuation was finally delivered to the wider workforce after extensive union campaigns. It was an important part of the 1985 Accord (Accord Mark 2) between the ACTU and the federal Labor Government at the time. This Accord provided a 3% national productivity wage increase that was converted to be paid as superannuation. That is, there was agreement at that time between the trade union movement and the federal government that the 3% productivity-based pay increase be diverted to establish occupational superannuation.

This 3% represents a foregone pay increase for workers and was not a grant from the employer or government. Over time legislation has been introduced to enforce compliance by employers, ensure payments for people not covered by an award, and to protect members' savings from fraud or negligent misappropriation. In particular the Superannuation Guarantee (SG) was introduced in 1992 and gradually increased to 9% in July 2002.

Do you need superannuation?

In Australia, the retirement income system is often referred to as being made up of three pillars. First, there is the 'age pension' which aims to provide a 'safety net' in retirement.

Second, there is compulsory superannuation.

Third, there is the opportunity for employees and employers to make additional contributions towards retirement savings through voluntary payments to a superannuation fund. This will be explained a little more as you read on, but superannuation can provide you with a comfortable retirement income if you take notice of your savings and are proactive about managing your funds.

Many people do not take much notice of their superannuation but as the average age of nurses in Australia is around 43 years old, the time has come for nurses to take a serious view of what they have and what they need. The last thing you need is to discover, too late, that your nest egg is far from adequate.

How do you get started?

If you work for an employer and earn over $450 per month, you are generally entitled to superannuation. Money is placed into a superannuation fund for you by your employer. This is done as part of your normal pay processes and should appear on your payslip. Many workplaces today have to offer you a choice of where you would like your superannuation money to be placed. This is a serious decision for you to make and this publication will give you some information on what to consider when choosing a superannuation fund.

You may not have to choose a fund if you are covered industrially by a state award, certified agreement or AWA that specifies the fund or funds where contributions are to be made, or if you are a member of a federal or state government fund, or if you are a member of a defined benefit fund. However, you should always check with your employer. Further information about choice of fund is available on the Australian Taxation Office website at www.ato.gov.au/super and on the Australian Securities and Investments Commission website www.fido.gov.au.

What is a superannuation fund?

A superannuation fund is an entity that holds your superannuation savings and through a variety of means invests your money with the aim of helping those savings grow through investment returns. It is a great responsibility taken on your behalf and with your money. Therefore it is important to know a great deal about your fund, how it operates, its financial performance, the fees it charges you, who shares your profits and so on. A check list has been provided at the end of this document to help you choose a fund that suits you.

There are many different types of superannuation funds. Below are some explanations of the major types of funds. See also the section on Member Investment Choice (MIC).

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Types of funds

Corporate funds:

Some companies establish their own corporate funds to provide superannuation for their employees. The employers are active participants in these types of funds and management of funds is generally done on an 'in-house' basis. The number of corporate funds has been steadily declining in recent years while other types of funds have been growing.

Industry funds:

These are funds that manage savings for many different workplaces and employers on behalf of their employees. They generally focus on people in a specific industry. Unlike other funds, industry funds do not have shareholders so all profits stay with the fund and its members. Historically these funds have generated strong investment returns to members because they aim to keep fees and charges to a minimum, most have no entry or exit fees and do not have to pay dividends to shareholders who may or may not hold superannuation savings in the funds. More importantly, most industry funds have trustees or boards which consist of representatives (employer and member/union) of the industry they represent. Many industry funds are 'public offer' funds, which simply means they have opened their membership to people outside their specific industry.

Public sector funds:

These are funds set up by federal, state and local governments for their employees. Most of these funds have been established under an Act of the relevant parliament.

Retail funds:

These are also known as master trusts or public offer funds and are established by financial service providers such as banks and insurance companies. They usually have multiple employers contributing to the fund on behalf of employees and may allow individuals to contribute to personal superannuation plans. Many charge fees based on a percentage of the member's balance and there might be high exit fees for withdrawals prior to the nominated retirement age. Some funds are required to pay dividends to shareholders meaning that not all profits go directly back to superannuation holdings.

Self managed funds:

These are for fewer than five members with all members being the trustees. They are regulated by the Australian Taxation Office and are subject to strict accounting and financial regulations.

Small APRA funds:

These funds have fewer than five members and are exempted from some prudential requirements under superannuation legislation but are supervised by the Australian Prudential Regulation Authority (APRA).

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Types of schemes

Accumulation funds

In these funds money is paid into an individual member account, with any interest from the scheme (whether positive or negative) allocated to members' accounts. Accumulation schemes have bank account style benefits so are easy to understand and they readily accommodate SG contributions from employers, part time employment and changes in employment patterns.

Defined Benefits funds

In these funds the amounts contributed by the employer are pooled in the fund. The benefit calculated and paid is based on a formula set out in the scheme's trust deed. This typically reflects a person's salary near to retirement, a benefit percentage and the number of years of membership or employment.

Hybrid funds

These combine the elements of defined benefit and accumulation funds. A common design for a hybrid fund is an accumulation benefit from member contributions while the employer sponsored benefit may be independent of the level of employee contributions or it may increase as the level of the member contributions increases.

Who pays superannuation and how much?

If you are employed your employer must generally pay an amount equal to 9% of your base salary or ordinary time earnings (OTE) * into your superannuation account **. This money is called the SG or superannuation guarantee amount. This is not deducted from your wages--it is paid over and above your base salary or wage. Nine percent of your wage is the minimum amount your employer has to pay. This does not mean contributions cannot be higher. Many workplaces have agreements in place that arrange for more than the SG amount. You might be in such a workplace so it is important you know how much your agreed superannuation payment is. You can also make your own payments on top of the employer SG payment to supplement your superannuation. Such payments attract tax concessions and can help your superannuation savings grow faster. The Australian Government encourages low income earners to make extra contributions by offering a co-contribution payment. That is, they pay $1.50 for every dollar contributed up to a certain amount depending on your income. More will be explained later in this document.

* From 1 July 2008, OTE will be the only earnings base that employers can use to calculate super contributions. It refers to the earnings on an employee's ordinary hours of work, and generally excludes overtime and penalties.

** SG does not have to be paid if you earn less than $450 (before tax) per month; if you are under the age of 18 years and working 30 hours or less per week; if you are aged 70 years and over; or if you are a non resident holding certain visas.

How do you know if your superannuation is being paid property?

To know if you are receiving the correct superannuation payments you need to know the following: What percentage payment your award, agreement or employment contract entitles you to? What fund is stipulated in your award, agreement or contract or which fund has been chosen as a 'default fund' for you by your employer? Can you choose your own fund, if so how do you go about this? Has your employer correctly calculated your entitlement? (This is based on your base pay rate so you need to know what your pay rate is.)

Have the contributions been made?

Some employers covered under workplace legislation, awards or agreements have an obligation to report in writing to their employees the details of the contributions made to a fund on pay slips. Check your Superannuation Fund Account Statement and compare this with your employer statements ensuring that they match. Your fund statement should be sent at least annually but sometimes you might get a half yearly statement as well.

How much superannuation do you need?

This is the burning question and it is vital you take the time to establish what amount of money you will require to fund a comfortable retirement. Generally speaking, Australians are now living longer and most look forward to a comfortable lifestyle in retirement. Not all of us want to work past normal retirement age simply because we can't afford not to.

Some questions that might help you decide your income requirements following retirement

* When do I hope to retire?

* What sort of activities do I want to maintain in retirement?

* What sources of income will I have apart from superannuation?

* Will I be debt free at retirement?

* What financial obligations will I have after retirement?

* How much money will I need every year?

Check list for choosing a fund

Returns

* One year return on Balanced Fund

* Five year average annual return on Balanced Fund

* Ten year average annual return on Balanced Fund

Fees

* Entry fee

* Exit fee

* Contribution fee

* Fee for switching investment options

* Adviser service fee

* Administration fee

* Investment management fee (ongoing)

Features

* All profits to members

* Online access to your account

* Commissions paid to financial advisers

* Supports your industry

* Member representation on the Board

* Full range of investment options

Insurance

* Low cost death and disability insurance

* What will l be covered for?

Portability

* The option to take your super fund with you when you change jobs

Access to extra services

* Low cost banking products

* Commission free financial planning services

* Commission free investment funds

Issues for women

There are some fundamental issues relating to the adequacy of superannuation for nurses that need particular attention. Nurses are predominantly female and although in recent years there has been some improvement in the superannuation position of women, the issue of the adequacy of their savings remains of particular concern. Men, on average, have superannuation balances that far exceed those of women. This is due to a number of reasons nurses will be familiar with.

Breaks in the paid workforce to undertake family responsibilities and part time work (now standing at more than 50% for nurses) mean lower earning capacity and therefore lower superannuation contributions. Other historical factors also compound the disadvantage, especially for older nurses including late access (1987) to superannuation for most nurses and past discriminatory treatment of some women (for example forcing married or pregnant women to resign).

There is also generally speaking a limited understanding of superannuation among both women and men. Limited understanding added to the facts that: many marriages end in divorce often leaving women in a poorer financial situation; many women no longer marry at all; women's earning capacity is still lower than that of men and; women live longer, make it imperative that women take responsibility for their retirement by being proactive about superannuation.

Federal Government Co-contribution scheme

Many nurses may be eligible for the co-contribution scheme. It came into effect in 2003 and is aimed at low income earners (less than $58,980 per annum). The Government provides a co-contribution of up to $1.50 for each $1 of after-tax contributions. Currently, the maximum annual co-contribution of $1,500 applies to incomes of $28,980 or less a year. It is reduced by five cents for each dollar of income over $28,980, cutting out at $58,980. "Income" is assessable income and reportable fringe benefits. More information on this scheme is available from the Australian Taxation Office on 131 020 or www.ato.gov.au/super

Taxes and superannuation

Superannuation taxation issues can be complex and can be covered here only in general and broad terms. If you would like to find out more information on superannuation tax matters you may wish to seek personal financial or tax advice.

Generally speaking, in terms of taxation there are three aspects of 'money flow' that can be taxed in your superannuation:

* contributions being paid into the fund

* money earned by the investments made by your fund and attributed to your balance, and

* the money you take out of the fund.

Taxes can be payable at all these points of flow, so it is often said that your superannuation is taxed three times.

From 1 July 2007 benefits paid are tax free if you access your benefits after 60 years of age regardless of whether you take a lump sum or a 'pension/ income stream'. And money in an account providing an Income Stream is also then exempt from tax on investment income. However if you have untaxed contributions (mainly public servants) you will still be taxed on your payouts. This is because you haven't paid any tax on these contributions. The rate of tax will be reduced once you're aged 60 or over.

For more information on the current taxes that are payable on superannuation benefits it is wise to consult your superannuation fund or seek personal financial or tax advice.

More flexibility and choice in how you take your super payout

Until now there have been strict rules about how and when you can take your super benefit. For example, under previous laws once you reached 65 and were no longer working, you had to take out all your superannuation--whether you wanted to or not. After 1 July 2007, things became more flexible. To take the example of someone retired over 65: they can now take some of their superannuation out--as a lump sum or as an income stream--and leave some in their account to continue earning income. Or they can work part-time and keep adding to their super.

Super Income Streams

Super fund members now have the option to leave their super with their fund when they retire, rather than take it as a lump sum. This way they can keep their money invested, and take advantage of new provisions which include no tax paid on investment earnings and getting a regular income stream, tax free if they are aged 60 or over. Even if a super fund member scales back their working hours to work part time, they can take advantage of the transition to retirement rules, which allows members to continue contributing to their accumulation fund, whilst drawing an income from it at the same time, subject to certain government conditions.

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Voluntary contributions to superannuation

Any amounts you put into your superannuation scheme within the contribution limits attract favourable tax rates and there are two specific tax rebates available for employees. One is for contributions for your spouse and the other for low income employees. If these types of personal contributions have already been made as after tax contributions, they are not taxed when returned to you on retirement.

Tax File Numbers (TFNs)

Super fund members who haven't supplied their Tax File Number (TFN) will be hit with the highest marginal tax rate plus the 1.5% Medicare Levy on most contributions. Also, if a super fund member doesn't supply their TFN, super funds are unable to accept any after-tax contributions they make. This means members won't be able to top up their super from their after-tax income and they could miss out on receiving a government co-contribution. Legally members don't have to supply their TFNs to their super fund but it does make good financial sense.

Super funds are required by law to safeguard TFNs, so members can be sure it will only be used for lawful superannuation purposes.

Salary packaging

Salary packaging is another means that may be available to nurses where you can pay extra money into your superannuation fund and gain tax advantages. Salary packaging arrangements should always be detailed in an industrial agreement.

Many 'not for profit' health and community service organisations are able to use salary packaging arrangements quite extensively because they receive favourable taxation treatment if they meet the ATO's definition of 'public benevolent institution'.

Put simply, salary packaging is when you are paid some of your salary as benefits (eg superannuation) before tax is paid. You benefit by paying less income tax. If you salary package into superannuation you can also benefit by increasing your contributions. However, there can be some pitfalls in entering such arrangements without advice. Contact your union and/or personal financial advisor to see if salary packaging is to your advantage, and that all arrangements with your employer are acceptable.

Salary packaging is sometimes referred to as salary sacrificing. The Australian Tax Office (ATO) uses the terms interchangeably. However, the important thing to note is that the details of the arrangements at your workplace, other than for super, will depend on the Fringe Benefits Tax (FBT) status of your employer. Your employer's FBT status will determine what percentage of your salary you can package/sacrifice and what the legal arrangements are for the process to occur. Please contact your union or financial adviser for information.

Spouse contributions

A tax rebate may be available for people who pay superannuation contributions on behalf of an eligible low income or non-working spouse (including a defacto spouse).

Consolidate your superannuation accounts

If you have multiple superannuation fund accounts you might be paying too much in fees and charges. There are circumstances where it might be beneficial to maintain a number of accounts but generally it is advisable to consider consolidating funds, or rolling over.

To get things started, you will need to fill in a form and send it to the super fund of your choice. It will also be easier to use the Government service that helps you find superannuation you may have lost track of. You can find out if you have any lost super by accessing a database maintained by the ATO (www.ato.gov.au and go to SuperSeeker). All you need to search the database is your name, date of birth and TFN.

Check out FIDO

Any number of variables can make a material difference to your final super balances. There are simple steps you can take that may assist you to optimise your retirement income. The Australian Securities and Investments Commission (ASIC) has a consumer website called FIDO which has a computer based model that enables consumers to see long term effects of different scenarios. This includes the likely effect on your superannuation balance of:

* common fees and charges

* making extra contributions to superannuation

* receiving the government co-contribution (if eligible)

* decreasing or ceasing superannuation contributions due to absences from the paid workforce and

* switching your investment strategy or changing funds.

This information can be accessed from the ASIC website www.asic.gov.au, follow the links to FIDO.

We gratefully acknowledge the following sources of information:

Queensland Nurses Union (QNU, Queensland ANF Branch)

Association of Superannuation Funds (ASFA) Industry Fund Services (IFS)

Australian Securities and Investments Commission (ASIC) FIDO Website

Australian Tax Office (ATO) HESTA Superannuation Fund

Member investment choice options

Many superannuation funds provide Member Investment Choice (MIC).This offers you a choice between investment strategies, each with a unique blend of assets designed to pursue varying performance objectives. MIC gives you more control over how your money is invested.

Different asset classes make up the various investment options you may have selected for your superannuation savings. Each asset class has a different level of expected growth or earnings potential and subsequently carries a greater or lesser degree of risk. There is a risk/return trade-off from high risk/high return expectations with 100% shares, to lower risk/low return expectations with 100% cash.

Shares

Shares, or equities, are investments in companies. A shareholder has part ownership in the business and its profits (or losses) and can receive income through the payment of dividends and capital growth if the share price increases. Historically shares gain the highest investment growth over the long term. But because of the volatility of the share market in the short term, they carry the highest risk of all asset classes.

Property

The principle categories of this asset class include office buildings, shopping centres, tourism resorts, factories and warehouses. Property earns money through rental income and capital gains. Property has historically gained moderate to high growth over the long term, but cyclical highs and lows in property values also generate moderate to high risk.

Fixed interest

Fixed interest investments were historically loans to governments, however with global privatisation there is increasing exposure to corporate debt. This investment class generates returns when the loan is repaid with interest. However these investments may produce negative returns if prevailing interest rates increase, or borrowers default. Fixed interest has historically produced a moderate rate of return for a moderate degree of risk.

Cash

Cash is typically money invested in the short-term money market. The initial cash deposit, plus interest, generates a return on investment. Cash has historically been the lowest risk form of investment, which is reflected in its returns.

Private Equity

Private equity investment mainly involves companies that are not listed on the stock exchange (unlisted companies). Funds can be used to expand or develop businesses. These offer prospects for high returns, but also carry higher risks than listed shares. These investments tend to be much longer term.

Infrastructure

This includes investment in roads, airports, power stations and other key community projects. Investment in infrastructure can take many forms, including loans to Government, direct equity in development or purchase, or loans to a participant in a development. These large-scale investments can generate worthwhile returns, although results will vary depending on the project's stage of development and the type of project.

Disclaimer

This information has been carefully compiled from sources we consider to be reliable. However, it is only current at the time of writing and may not be accurate in all instances. The information is of a general nature and does not take into account individual financial circumstances, needs or objectives. You should look at your own financial position and requirements before making any decisions and you may wish to consult an independent financial adviser when doing this. You should always obtain a copy of the relevant Product Disclosure Statement from the superannuation fund before making a decision about its products.

The ANF Federal Office does not provide financial advice.
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Publication:Australian Nursing Journal
Geographic Code:8AUST
Date:Jun 1, 2008
Words:4126
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