Superannuation Australia

[EliseHearts]

Hello everyone!
Apologies if this has been covered in another post, but I couldn't find it.

Can someone please explain to me how superannuation works? Or know a good resource that explains it?
I pretty much understand 401k but that's not very useful to an Australian student. Are they similar?

I've recently joined the mustachian bandwagon and even though I'm only a uni student, I feel that understanding how super works will be really important when I join the workforce.

Thanks for your help!
Regards,
Elise

[marty998]

Hi Elise, welcome to the forum.

Super is a lot less complicated than it's made out to be.

Do you have a part time job? If you do, you probably have 9.5% on top of your wages paid into a superannuation fund. The fund then invests your money into a variety of different assets such as shares, bonds, property and infrastructure.

Superannuation investments are subject to whats known as the "Sole Purpose Test" - that is, the money must be invested solely to provide for retirement benefits - you can't access it for personal use until you meet a condition of release such as turning 55, and/or retiring.

As a trade off for not being able to access this money for a very long time, the 9.5% contributions made and the earnings within the fund are taxed at a concessional rate of 15%, instead of your marginal tax rate.

THis is of no use if your marginal rate is zero (if you earn less than $18,200), but is one of the best deals out there if your rate is 49%.

Tell us about your fund (if you have one/know the details) and we can have a look at whether it is best for you.

** sorry will edit this post - you did imply that you're not currently working (slap me for not reading properly).

ta

[EliseHearts]

Thanks marty998! Wow, that's a lot simpler than I thought. I assume that is 9.5% of salary before tax?

I have two super funds, from two (current) employers.

The first is TelstraSuper:
I have $310 invested in their "MySuper Growth" option.
http://www.telstrasuper.com.au/Investments/Investment_options/MySuper_Growth

My second fund is UniSuper:
I have no idea how much is invested right now, but I suspect it is less than what is in TelstraSuper (so, almost negligible).
I do know that my investments are all in the 'Balanced' option.
http://www.unisuper.com.au/investments/investment-options-and-performance/super-performance-and-option-holdings/balanced

The TelstraSuper fund isn't bad, in terms of long term growth. UniSuper is a probably a bit too low risk, though.
I wonder if there is value in going 100% international or Australian shares? Although they are riskier options, they are simpler options and fit better to the Mustachian investment strategy (I think?). I won't be accessing them until I'm 60, according to the preservation age table on the ATO.

I've also read you can start a 'self-managed' fund - what's the general opinion on these? It seems like they would be good, if you could simply invest in Vanguard and call it a 'superfund'.

Cheers!

[deborah]

If you work for Telstra and a University, they probably put more than the 9.5% into your superannuation (depending on their awards - you can check with HR or use a pay slip to calculate) - but it might have been less in the past, as 9.5% only came in a short time ago. This is all pre-tax. You will see that 15% is taken out by the fund as it is deposited (the 15% Marty mentioned).

Generally speaking, it is better to have your superannuation in only one fund - especially if you have a small amount of superannuation - as each fund takes out account keeping fees, and they often eat up all the earnings if you only have a small amount in superannuation.

You can join whatever fund you like, and move from one fund to another whenever you like. However, some employers have restricted funds (restricting who can join - your Telstra fund is one, and I think Unisuper is another) - but you may be able to get them both to put it into the same fund. I think both are quite good funds, with lower fees than others, so I would stay in one of them if you can. Most funds have several different options, and you can put some funds in each option if you want to (certainly your Telstra one does).

Generally speaking, it is recommended that people only create a SMSF once they have sufficient money to reasonably cover the fees - about $200,000 of superannuation is the minimum I have seen in some places for starting an SMSF.

If a fund isn't accessed for a while, it goes to the Tax Office (obstensively to stop it disappearing in fees) and after a while there it can be grabbed by the government and put into consolidated revenue - another reason to amalgamate your superannuation.

[happy]

If you are looking for more detailed information about super try googling Trish Power's super guide, or moneysmart ( a govt resource).

[terrier56]

Unisuper is one of the worst funds available for young workers. It offers a pension for its senior members if you make it that far but if not then the fees it has goes towards supporting those senior members.

Telstrasuper seems fine.

You should consolidate your super as soon as possible into one account. This will stop you doubling up on fees and insurance.

[deborah]

Apologies - I couldn't get to unisuper - take terrier56 advice.

Ah yes, insurance. With almost every fund you get the option of insurance (total and permanent disability) - it is good as it is pre-tax $ rather than post-tax $ and the superannuation funds get good prices for it (but you may decided you don't want it at all). However, you only need it once - so if you do decide to have more than one fund, cancel it out of one of them (I cancelled mine from my second fund).

[stripey]

Re: Unisuper- just be aware that Australian universities are not required to allow a choice. If they don't allow a choice, then the fund they will (uncompromisingly) pay your super into will be Unisuper. It is a restricted fund, like TelstraSuper.

If you're like me and likely going to spend a bit of your career in the ivory towers, this can be a bit of a pest and may affect your decision.
(I'm 29 and have been on the books of three different Australian universities, and only one offered a choice of super funds. Grumble).

Also- some higher education sector awards do 9.5% and some do 17% so you may want to check on which one you fall into.

[marty998]

Thanks marty998! Wow, that's a lot simpler than I thought. I assume that is 9.5% of salary before tax?

I have two super funds, from two (current) employers.

The first is TelstraSuper:
I have $310 invested in their "MySuper Growth" option.
http://www.telstrasuper.com.au/Investments/Investment_options/MySuper_Growth

My second fund is UniSuper:
I have no idea how much is invested right now, but I suspect it is less than what is in TelstraSuper (so, almost negligible).
I do know that my investments are all in the 'Balanced' option.
http://www.unisuper.com.au/investments/investment-options-and-performance/super-performance-and-option-holdings/balanced

The TelstraSuper fund isn't bad, in terms of long term growth. UniSuper is a probably a bit too low risk, though.
I wonder if there is value in going 100% international or Australian shares? Although they are riskier options, they are simpler options and fit better to the Mustachian investment strategy (I think?). I won't be accessing them until I'm 60, according to the preservation age table on the ATO.

I've also read you can start a 'self-managed' fund - what's the general opinion on these? It seems like they would be good, if you could simply invest in Vanguard and call it a 'superfund'.

Cheers!

Ok ignore SMSFs for now. Shouldn't be on the radar for you for a while yet. Low balances will get wiped by accounting & audit fees.

You're currently in the very low balance trap - where most if not all of your balance gets eaten up by insurance premiums. Most funds will sign you up for some form of Death, TPD (total or permanent disability) or income protection, or all 3. It's not fair, it should be banned, but because nobody bothers to understand it, and 99% of the time it affects young people, there's no real political push to have the law changed. Sad but true.

Would not suggest you to cancel your insurance entirely, but be mindful of how much it is costing you.

Right now you probably earn under the cutoff to access the government co-contribution. I'd suggest you put $1000 into the Telstra super fund (called a non-concessional contribution). Once you complete your tax return for 2015 later this year, the Government will add an additional contribution to your fund depending on your income. It's essentially free money and the best return on investment you'll ever see.

I echo the comments about combining your super - 2 funds mean 2 sets of fees and insurances. Figure out who will likely be your main employer in future (Telstra or Unisuper) and combine your super into that fund.

If you are not going to be with either of those, my recommendation would be to open an account with either Australian Super or REST super and move your money into one of those. You can download the rollover forms from each of the funds websites.

[EliseHearts]

Thank you all so much for your advice!
I've been trying to find out as much as I can about my funds and their fees etc. Unfortunately it's going to take some time to gain access to my UniSuper fund, so I'm not sure what the situation is on that money, but I'll try consolidate it into TelstraSuper and get all super paid into that account if I can.

Is it safe to go completely without insurance on my super? I'm barely in the workforce yet, so I can't imagine I need any protection yet, and whatever fees I can avoid is a big plus.

I'm also curious about making contributions. Are they worth it?
I can see the gov't contribution are a big bonus, but I suspect that by following the mustachian principles of investing, there is not really much need for super, especially since they can't be accessed earlier than preservation age.
I'd appreciate some opinions and explanations on this point.

Thanks again, everyone!

[Mark31]

My small experience with super funds and insurance is that if you drop Death & TPD, that super fund won’t let you pick it up again later. Income protection you can pick up and drop as you feel like it (with rules in there to stop people picking it up because they know they are already sick).

However, if you start up an account with a different provider, they will cheerfully sign you up to the Death & TPD insurance.

The only reason, in my mind, to have death (TPD) insurance is if you have children, and even then, only if you have young children and your spouse might have trouble working, or you have a large mortgage, and you don’t want to leave them with both your death and a foreclosure. TPD stands for Total and Permanent Disability, and you have to be really, really disabled to get it. Having an injury that merely leaves you wheelchair bound would not usually qualify you for it.

Income protection insurance gets progressively more expensive as you get older. You might not really need it, but it’s probably not costing you much either. However, I would ditch it in your situation. Access rules vary, but you first have to use up all your sick leave, then have a period of no pay before you can access it.

With putting extra contributions into super, The 50% match for $1,000 for low income earners is a really good deal, and might be worth it for you. Putting anything extra in without a match, given your age and income, is not worth it. You should look into employer matching. This is not just a US thing, although it is much less common here.

[deborah]

With putting extra contributions into super, The 50% match for $1,000 for low income earners is a really good deal, and might be worth it for you. Putting anything extra in without a match, given your age and income, is not worth it. You should look into employer matching. This is not just a US thing, although it is much less common here.

+1 and Telstra and an organisation that have UniSuper would both be more likely to have some employer matching than almost any other organisation. They are both also more likely to have their contribution at something more than the mandatory 9.5%.

[agent_clone]

Unisuper is one of the worst funds available for young workers. It offers a pension for its senior members if you make it that far but if not then the fees it has goes towards supporting those senior members.

Telstrasuper seems fine.

You should consolidate your super as soon as possible into one account. This will stop you doubling up on fees and insurance.

What you are saying about UniSuper is not strictly correct.  It is correct if you choose the Defined Benefit Fund option however there are also Accumulation 1 and 2 options.  I think Accumulation 1 is for older workers however, but Accumulation 2 is certainly available.  Accumulation 2 acts like most other superannuations in that the amount goes up and down depending on the markets.  The DBD fund provides a pension at the end.  Personally I wouldn't suggest DBD unless you are planning on working within the university sector for a long time, even then there are the issues you are talking about.  So assuming they have joined within the last one or 2 years they should be able to switch over.

[Rob_S]

Hi - you've brought me out of lurking. I have worked in super for the last decade.

Australian Superannuation is nothing like the Canadian or American retirement savings accounts where there are exploits and cont matching to boost you balance and draw down early. Super is terrible for a young Mustachian seeking financial independence, it cannot help you retire early.

Your money is locked away period till you are 65 though given how both political parties are talking expect this to be 70 sooner rather than later. Super is not a Mustachian route to early retirement at all.

That said Superannuation is compulsory so you might as well work out how to make the system work for you.

Pick the fund you want not the one your employer gives you
You have choice of fund, your employer has to pay your super into the account you nominate. They will ask you for an account when you start work. You can set up an account with any fund you like.

Like any investment Low Fees are critical
Given you're young I'd look for a fund with low fees (admin fees and Management Expense Fees (MER)), these tend to be industry funds, google 'industry funds' to find out whats out there. High fees wreck your return in the long run.

Investment choice is great
I have vanguard indexed funds in my superannuation. Pick an industry fund that gives you access to the investments that you want. I might rebalance once a year but I am set and forget. I wont touch this money for a good 30 years so I am fine with volatility and went with VAS and VHY etfs.

Pick the insurance you want
If you have no financial dependents pick $0/cancel your insurance. You can apply for cover later if your circumstances change. It's not a big deal. You will do a blood test and fill in a lifestyle questionaire. Insurers are more than happy to take your premiums and will accept you for a standard level of cover unless there is something drastically wrong.

Consolidate your super into the account you want - without drama
Rolling over your money used to be a hastle. Then the Government stepped in to cut all the bullshit funds put you through. Use the MyGov website superannuation section to tell your other funds to rollover your other funds into the account you want. The other funds MUST rollover the funds ASAP when the MyGov website tells them to do this. This is the fastest, guaranteed way to get all your funds in the one place without filling in forms and jumping through funds hurdles and internal regulations.

Don't expect your employer to put in more than 9.5% super, it will go up in a few years time and cap out at 12%. Even then who cares, you wont touch the money for 40+ years, you're not relying on this money to become financially independent.

Don't go the Self Managed Super Fund (SMSF) path unless you have $200,000 in super and even then it might not be worth your while.

Personally given how long it is before you can access your super I wouldn't put in any extra pre or post tax contributions until you are close to retirement age.

Get financially independent well before you turn 65 and think of your super as a nice bonus.

And on a final note expect the government to change the rules around super from year to year (either to grab more taxes or push the release date further out), they have so far. I can't complain as the constant changes keep me in a job :)

[urbanista]

Super is terrible for a young Mustachian seeking financial independence, it cannot help you retire early.

Super is not a Mustachian route to early retirement at all.

I think the above is not true.

Your money is locked away period till you are 65...

This is wrong. The preservation age currently is 60, not 65.

I personally can't see what is the economic benefit to increase superannuation preservation age to 70. I understand the benefits to increase the age pension eligibility age to 70, but super? Increasing preservation age will put more burden on the taxpayer, not less. We are going to have all those unemployed and broke 60 to 70 y.o. people who cannot find any work due to age or cannot work due to health issues. What are these people gonna do? They will go on the dole. Instead of letting them access their own money in super, the taxpayer will have to pay them unemployment! I don't see how this can be a good idea from the economy point of view. Also, aging population means voting power shift to the hands of seniors. Lifting superannuation preservation age to 70 is like abolishing negative gearing on investment properties: everybody talking about it, but no political party dares to go ahead with this.

In terms of retiring early, super can be a great tool if used correctly. The most important point is to have a paid off house valued at least 500K as a back up asset. Our plan is to retire at 45. At that age, we will have a 650K-850K house owned outright, and taxable investments to cover 15 years of expenses to get us from 45 to 60. Then we plan to access superannuation. What happens if the preservation age is increased by 5-10 years? If we do run out of money before super is available, we will might try going back to work for a while or just claim unemployment.  The true mustachians would be fine even on the dole alone since it is about $26K annually for a couple. Remember, all we need is to survive until we can access the super. Yes, those years we won't travel and dine out, so what! If we want to supplement the dole, we can tap into the house equity offset account or simply downsize.

Why super is so great? Because it boost your investment returns. We max out our super (at 30K per year each) and pocket about $9600 every year due to tax concession. Plus all income inside super is taxed at 15% instead of 39% which is our current tax rate.

[deborah]

Urbanista is right - if you are in a high income tax bracket. If you are in one of the bottom two income tax brackets, it possibly isn't worth it - unless the government co-payment works out well for you.

[vagon]

You should consolidate your super as soon as possible into one account. This will stop you doubling up on fees and insurance.

+1

Why super is so great? Because it boost your investment returns. We max out our super (at 30K per year each) and pocket about $9600 every year due to tax concession. Plus all income inside super is taxed at 15% instead of 39% which is our current tax rate.

+1

--

Under cocontribution, anyone who makes a non-concessional (after-tax) contribution and earns < ~$49 a year can essentially get free money. Do this.

Other than than that you need to honestly evaluate your FI target. If you can do it before age 55 you should consider whether super is a good option, you wont be able to access the funds. even now its hard before 60. So the main message is you'll need to bridge the gap of expenditure with other funds until your super is accessible.

[stripey]

Apologies - I couldn't get to unisuper - take terrier56 advice.

Ah yes, insurance. With almost every fund you get the option of insurance (total and permanent disability) - it is good as it is pre-tax $ rather than post-tax $ and the superannuation funds get good prices for it (but you may decided you don't want it at all). However, you only need it once - so if you do decide to have more than one fund, cancel it out of one of them (I cancelled mine from my second fund).

Sorry, I didn't see this before. I did the same thing and for the couple of years I had multiple super funds*** I cancelled TPD insurance on one of them. Every time I talked to that super fund over the phone, they tried to talk me back into it and it was also highlighted on every statement. Still didn't make me want to pay double insurance, LOL.

***Long story which is not worth retelling.

[stripey]

Cheekily attempting to resurrect this thread.

If you're young-ish (32?) is there any reason you *would* choose a DBD rather than an accumulation option? I am switching employers and the new one offers an conventional accumulation or a DBD option via UniSuper. The employer contributes more to a DBD than an accumulation (17% vs 10.5%) but as I see it the DBD option requires additonal 'voluntary' contributions and far less flexibility. And if it looks likely that I'd switch employers before 5-10 years I'm not sure what benefit it would be.

[marty998]

Defined benefit options work really well if you're planning to keep contributing right up to 60-65. Pension is based on length of service and final salary and all that etc.

You don't plan on working that long do you?

[stripey]

Thanks for the response Marty and that's kind of what I gathered. However there's a decent likelihood Ill work right up to 60, as I quite enjoy what I do- even after doing it for a decade! Early retirement isn't a huge motivator for me. BUT as my husband-to-be is seventeen years my senior I wouldn't make it much past 60 I think simply due to lifestyle considerations.

The big problem with the way my career will likely pan out is that it's likely I will bounce between professional and academic schedules with resultant wildly varying salaries and penalties- academic generally pays far less! My gut feeling is that if I were to settle down in one job for the rest of my career a DBD would work well... but I doubt I'll do that. And plus, all these temporary contracts keep on coming up in exotic places like the Caribbean...