Episode 47: Everything you’ve wanted to know about Superannuation!
March 28, 2022
Nick Zara from Consilium Wealth again joins us to explain to us the ins and outs of Superannuation...you know that 10% your employer puts away for your retirement? Trudi and Sarah fire all the questions at Nick such as what is Super, how is it invested, can you choose your investment options, insurance and so much more. We talk about how to get more money into Super and when and how can you take money out. We also run through some government incentives that you may not be aware of such as the government co-contribution and the First Home Saver Super Scheme. So for all things super, this is the place to start in understanding your own retirement savings.
Podcast Transcript Available Here
Duration: 23:59
Trudi Cowan: Welcome to today's episode of financial FOFU. Today we have once again, got Nick Zahra joining us to talk about superannuation. A topic that I think a lot of people probably don't really understand as well as they should. Sarah Eifermann: I was going to say don't like. Nick Zahra: But they should like it. Trudi: They should like it. Exactly right. It's their money that's being accumulated so they can have a great retirement. Nick: Exactly Sarah: What's up to like? Trudi: Absolutely. Most people don't even look at this statements. So, how many of you took the prompt from last week and went and got your statement out and looked at your EFT? Sarah: I didn't. I forgot. Trudi: So, what is superannuation? Nick: Okay. What is super? It was set up a while back, I would say that 15 years ago, plus 20 years ago now should be able, Trudi: I was going to say it's more than 15, Nick: Yeah, about 20 years ago. It's basically there for your retirement, Sarah: Nick. Sorry to interrupt. Do you realize how old we are now? Because 20 years ago was 2000 Nick: Yeah, Speaker? [inaudible 01:13-16] Nick: that should be 1990 something. Sarah: [unclear 01:16] was not in power 20 years ago. Trudi: So, we start that again? Sarah: None the less. Nick: When did super start in Australia? I'm just Googling it. 1992. there we go. Sarah: There we go, there we go. Trudi: [inaudible 01:32-35] Trudi: [inaudible 01:36] left the prime ministers' office Nick: Who's Bob Hoult? That's the guy who drinks that beer, and that is screwing the [inaudible 01:44]. So basically in 1992, that was when super was set up and it was mainly set up for people's retirement. Basically, with regards to super, it's for retirement and the way I look at it and the way I explain it to all my clients, it's a way of investing your money and also tax friendly. That's the number one thing about Super, it's tax friendly. Trudi: Yeah, it really is. Nick: And a lot of people don't know that's what it is, every single person, not every single person, but most people, I would say 99.9% of the people don't understand the ins and outs and what the benefit about it, so that's where, yeah. Trudi: So how do we get money into super? who's putting the money in there. Nick: Well basically what it is, if you're employed by somebody and what happens is you are on a hundred thousand dollars, ten thousand dollars each year goes into super, so that's basically 10%. So, that's pretty much what happens. Now, the benefit about this is that, if you are earning a hundred thousand dollars a year, your tax brackets in the 30% mark on any income and earnings, what I was talking about being tax-friendly about super, is that the income and growth in your super fund, you only getting tax between 10 to 15%, depending on what type of asset you got inside that. Trudi: So, there's definitely just a clear, a clear tax saving in there. Nick: Yeah, definitely. So, if you are basically in your fifties or whatever like that in your later towards retirement, it's actually, there are more benefits with regards to having money in super because you're not paying that much tax in comparison, to having it in your own name. Sarah: Trudi and I, talk about this tax planning, tax planning, tax planning, this is specifically one of the things that you look at when you do tax planning as to whether or not you should be making a contribution Nick: Exactly. Speaker: Yeah, yeah. Sarah: So, it does have a functional; It's not just theory; it does have functional benefits that you can achieve and have outcomes from. Nick: Exactly. Trudi: And, and obviously the more that you put into your super, the more you're going to have there for your retirement. Nick: Exactly. Trudi: At the end. Nick: And, in regards to the initial time when you are accumulating that wealth, you're paying the minimal tax you're paying half the amount of tax you would in your own name, but when you turn 60 plus and depending on when you retire, stop working altogether anywhere between 60 to 67, if you stop working that money that you are paying 10 to 15% tax, you'll be paying zero tax, that's the benefit of superannuation where you'll have an income tax free. Trudi: That would be amazing. Nick: Yeah, it is. Sarah: That's the planning part though, right? Nick: Exactly. So that's, that's the main benefits of super. So, when you're looking at superannuation it's a vehicle where you're putting your money in for retirement, but the main benefits are that you are looking at is, low tax between 10 to 15% and then retirement is they are tax applicable. Trudi: And I guess the main restriction, which a lot of people say is the downside is that once the money's in super, it is locked away until you meet certain conditions to be able to release it. Nick: Exactly. They call it preservation. So basically, the money is preserved and basically, the preservation age is age 60 and fully retired. Trudi: Okay. Sarah: You can't touch it. Nick: Well, you can't actually use it for your own personal use. You can invest in the other assets, like what we talked about in the last episode. So, you invest in what you want to invest in. So, if you want to invest in Australian shares, or if you want to invest in global shares, or if you want to invest in property, you can do that, but what it is, because you're getting these tax concessions, like, you're not paying any of that much tax, basically, that's how it's all set up. Trudi: Now a lot of people probably are familiar with the ads on TV for industry super funds and they hold their hands in that funny little: what's the difference between an industry fund and probably, what are the other ones called like a retail fund? Nick: Now industry funds and retail funds between the two of them they're much of a much is between the two of them. They've basically got their place, depending on the person. With regards to industry funds; it's a good fund where you can pretty much; your funds go into the account, they get invested, it's basically what they have is default fund, where in regard to a retail fund; with that, you generally go through a financial planner and they're more set up pretty much the same way. So, it depends on which way. Trudi: S0, why would you go to the financial planner then instead? Nick: It depends on your circumstances. An industry fund is basically good for a low balance, so, it is an easy one to do basically. And generally, what happens is an employer will have an industry fund available to them and it's basically just a put into the fund and then set up and earn to get pretty much. Trudi: Yeah. Nick: Where retail fund generally what it is, it's, you are basically getting personal advice and you are basically doing it for that particular reason, what you might have with goals. [inaudible 07:22] Trudi: So, it's a bit more catered in terms of the industry [inaudible 07:38] Nick: Correct. Yeah, yeah. With myself, I do have industry funds. I use Australian super for clients as well. So, depending on the client's balance and what their needs are, and then also I've got the retail funds as well. So, I've got the two options available to myself. That all depends. More to do with the industry funds up. its client fund under a hundred thousand dollars is pretty much, Trudi: Okay. Nick: Yeah. Trudi: All right. how much? I know the answer to this question, but I'm going to ask you; how much, how much can we actually put into super, are there restrictions on how much money you can put in each year? Nick: Yeah. Trudi: How much money your employer can, can put in each year. Nick: So, basically with superannuation, there's what they call; they've got these caps: because they're so tax-friendly, so, in other words, you don't pay as much tax within it. They do have restrictions on how much you can put in. Trudi: Yeah. Nick: So, to give you an example; we talked about before, you earn a hundred thousand dollars, you've got $10,000 going to your super now in regards to that type of contribution, what they call concession contribution, you basically have a maximum of 27,500 per annum. So that's the maximum you can put in. And the way, how would you get to that 27,500? Well, you basically got your SG, which is your superannuation guarantee contribution, which is from your employer, and then as an option, if you want to reduce your tax, you may want to put another 17,500 as an option, in that way you don't pay 30 cents on a dollar tax, you only pay what they call a contribution tax of 15% when the money goes into super. Trudi: Yeah. And this is something that we would often have a look at when we were doing tax planning with our individual clients about what, actually is your cap and how much is your employer already. Nick: Exactly. Putting in, Trudi: Putting in. And therefore, what's the difference that worthwhile you're putting in just to make sure that we don't go over those limits. Nick: Yeah, exactly. There's also just one thing to point out as well; that's the cap per year, and then there's also this little thing you need to know about as well is, that you can go over 27,500, as long as the previous five years. You haven't gone over that as well. Trudi: Yeah. Carry forward. Sarah: Yeah. Trudi: Yeah. Sarah: So, the only one thing I wanted to bring up is they have just recently changed the super cap though. Haven't they, Trudi: It was 25,000. Nick: It was 25,000 now up to 27500. Sarah: And then for next financial year has it gone up again? Nick: No. Sarah: Haven't announced that yet. Nick: No. Trudi: No, still staying the same. Nick: Exactly. Yeah. But I believe the SG contribution is going up a half per cent next month Sarah: Yes, yes. So maybe it's the SG contribution instead. Trudi: SGS is going up, there's also some changes that have literally just gone through as well, that previously an employer would only have to pay super after you earn $450 for a month. Sarah: Yes. Trudi: But that's been scrapped. So, they'll now have to pay superannuation to everyone. Sarah: Regardless of how much they earn. Trudi: Regardless of how much; yeah, yes. Sarah: Fantastic. Trudi: Which is great for low-income earners. Sarah: Yes. And the reason it's important to know what the super cap is is because come tax planning, if you do your tax planning too late, you need to find the money to put into Superfund. You may not have it in physical, tangible cash. Trudi: Yeah. Cause those limits will work on a what's reached the fund within a financial year. Correct. Sarah: Correct: so, it has to be put in before the financial year ends. Nick: Yeah. So, it [unclear 11:13] to your accountant but less definitely February, March. Trudi: Exactly. Sarah: That's why we say none tax planning has to be done in March for this exact reason. All right. So, we've supposed that was really just talking about voluntary and concession non-concession contributions. Nick: So basically, you got concession contributions, that basically what you do, your tax planning to minimize your tax, but there's also what we call non-concessional, so, this is money that you maybe have in the bank account that you want to invest in, so that's basically the caps there, depending on how much money you've got in your super and all that. But generally, what you're looking at is about $110,000. You can put in each year into your super as well, but you can put more, but if you're putting in more get advice. Sarah: Okay. Rollback a sec though. Why would you put your savings into your Superfund? Nick: Why? Sarah: Yeah. Nick: Well, remember that we talk about before, that, if you are earning a hundred grand a year, you're getting tax in the 30% mark? Well, what you can do, you can have those assets in super and get tax between 10 and 15%. So, you're reducing your tax by half. Sarah: Right. So, if you're in the higher tax bracket putting some of your own cash on top of voluntary contribution, Nick: Correct. Sarah: Is potentially something that people should be looking at? Nick: Correct. But get advice in regards; because as we said, money is preserved when it goes in making sure that you know, what you're doing is the right thing. Definitely. Sarah: So, I don't know if this is a Trudi or a Nick question, but then what is a Div. 2, 3 9 Trudi: Div. 2, 9 3? Sarah: Sorry, 2, 9 3 Nick: You can go Trudi Trudi: So, this is an additional tax that is applied to high-income earners on your superannuation contributions. So, if you earn over $250,000 basically what the government is saying, it's not fair that you get the concessional 15% rate on your contributions, because you are such a high-income earner. So, they, therefore, tax those contributions at a higher rate. It often comes as a surprise to my clients because the ATO assesses this, it's not something that your accountant calculates for you. And it's a letter, it usually comes a month or so after you've lodged your tax return. Sarah: So, it's a nice surprise? Trudi: No! it's not a surprise. We try and warn clients where we know it's coming. But the one thing to note about that tax though, is it can actually be paid out of your superannuation funds if you choose, or you can pay it out of your personal cash, depending on your circumstances and how you wish to deal with it. But if you are a high-income earner, definitely, one to be aware of. While we're on contributions, though, there are a couple of programs that the government does help, to help promote contributing to your super, Nick, so could you maybe run us through the co-contributions? Nick: Yeah, definitely. So, with the co-contributions, they're going from the high-income owners to the lower part of income owners working part-time. Co-contribution, if you're earning less than 41,000 odd dollars per year, what happens is, if you put in a thousand dollars of contributions, what happens is the government gives you $500 into your Superfund. Trudi: Okay. Nick: So that's basically called the co-contribution. If you put 1,500, you don't get any more than that. So, you only still get the 500 bucks. So that's basically what it is, and it works on a sliding scale. So, if you earn anywhere between 41,000 to 56 odd thousand it actually reduces what you get back from the government. So yeah. Trudi: So, it's just helping to boost the balance of low-income earns? Nick: Correct. Trudi: With just a little bit extra each year? Nick: Yeah. Correct. Definitely. Sarah: So, if you sit in that bracket, get some advice about potentially; or even ring your current super fund and ask them; Nick: Yeah. What it will be roughly. Sarah: Yeah. If you put in a thousand dollars if you can afford to put in a thousand dollars and pick up an effectively free 500. Trudi: Yeah, and this is off the voluntary contribution, isn't it? This is not your employer? Nick: This is coming out of your own bank account. Sarah: You have to put the money in. Nick: And also, remember the money is preserved. So, you weren't able to touch it until your retirement. Sarah: Yes. Minimum age 60 Nick: Correct. Or retired as well. Sarah: So yes, that's probably a fair point to make. So, you can retire before the age of 60 and formally retire and then access your super, Nick: Before 60, you can't touch your super. Sarah: Right. You can't touch your super, you can formally retire, but you can't touch it until the preservation age is 60. Nick: Correct. Sarah: Okay. Trudi: Which may be, which may be higher by the time we retire. Let's be honest. Sarah: We're never going to be allowed to retire. All right. So, what's then the first home's super save scheme. Nick: Okay. That first home super savers scheme is pretty much for people that are looking at buying a property in the new future. And the way it works is it's a way of actually putting money away so that you can use it as a deposit for your home. So, it's sort of like a forcing way of actually saving up for a deposit. You can basically put up to $15,000 each year, and then, I think it's a maximum of 30,000. Sarah: Yeah, I think so in the, in the one year. Nick: And basically, the contributions that you can take out, of what you've put in of yourself, but not your employer. Sarah: Yeah. Nick: So that's basically it. So, what it says is basically any non-consensual contribution that you put in you can take a hundred per cent of the amount, but if you are sacrificing into your Superfund concessional, you can only take 85% of that out. Sarah: So, the whole point is to make it so that you can save for a home faster. Nick: Exactly. Sarah: When they first bought this out, it used to have a lot more restrictions like you couldn't take it out to year four, and I know a lot of them have been removed since then. Do you have many clients using this at all? Nick: A couple, not that many. Because not many people actually; I don't believe that many people know about it, I think that's where it is. Sarah: That's why I was asking because I only ever had one or two people ask me about it and I never had a customer come with the fund to [inaudible 17:56] Trudi: I've only ever had a couple. Nick: It's more to do with people where they come and say to me, Nick, I'm looking at buying a property in three to four years' time, what's the best way of doing it. And you talk about the different options and that's where it's come up. I brought it up a couple of times when I used to do seminars with; when I used to look after a corporate employer where we used to do their Superfund. So, we used to talk about then, but yeah, not many people know about it, Trudi: But Sarah, we did speak in an episode a few weeks ago about savings. And some people like to have their money locked away, so they can't touch it to help themselves. If you are that sort of person, this might be something worth considering. Nick: Yeah. Having said that. Sarah: Absolutely. It definitely has legs potentially for you. You've just got to work out how long your goals are until you want to buy something. Because once it's in there, it's not just as easy as going to your bank account and getting it out, like you have to actually be in contract to get it out. Nick: Exactly. Sarah: Awesome. Trudi: The other program I've got here is the downsizer contribution now that's our retirees, isn't it? Nick: Exactly. Yeah. I've been doing quite a bit of this. The way it works; what this downsizing means is that clients that; remember how we were talking about putting money into superannuation, so once you're over 67 years of age, you can't actually put money into super unless you're working. So, what the downsizer contribution is all about is people that say they're in their 70, they might have a large home, and they think on what; I'm sitting on this home, I've got no more money. What they can do is downsize their home to a smaller house and the proceeds what's left on that home they can put into superannuation as well. Trudi: And as we said earlier, the benefit of that then is it in your low tax, and for them probably in pension phase, no tax environment. Nick: Correct, environment. Sarah: Whereas if they left the money in a bank account, and earned interest on it, they would then pay tax on that interest. Nick: Yeah, exactly. Depends on the income, definitely. Sarah: Okay. So, that leaves us with one final point to talk about, which is, what is a pension cap? Nick: Okay. So, basically pension; if you're fortunate enough to have quite a bit of cash into your Superfund, to what we said about before, so you got your accumulation, so you accumulating your wealth and your superannuation, and then when you turn retirement between 60, 67 plus, you turn your accumulation fund into what we call a pension fund. And the way you look at it is it's like a bucket, you basically put a tap on it, your super bucket and you draw an income from it. Now the maximum amount that you can actually have is 1.6 million dollars in that tax-free environment, Trudi: Is that ever, or at one time? Nick: At one time. Trudi: Okay. So, you can draw that money out as a pension and then move more inter the pension phase [inaudible 21:00] Nick: As long as you don't go over; Correct. Trudi: Okay. Sarah: So, you need to be on top of the management of that fund to make sure you don't go over? Nick: Exactly. Sarah: Otherwise, you would be in trouble? Nick: And generally, if you've got that much money you'd speak with a financial planner, and they'll be basically looking out for it as well to make sure that; yeah. Sarah: What are the implications of going over? Nick: What you need to do is wind back that money out and put that money back into super where be tax at between 10 to 15%. That's the main thing. Sarah: So, there are some serious implications potentially. Nick: Yeah. So, you want to keep in line as well. Trudi: I guess the one thing to be aware of is that super is a very heavily regulated sort of area. And we've mentioned a lot of rules today, which there are often penalties if you breach those rules. So, it's certainly an area that's worth getting some advice or assistance with. Nick: Definitely. Trudi: And if people, aren't sure about a financial advisor, do the superfunds themselves offer levels of advice, Nick: They do. Trudi: People just want to have a conversation about these types of things. Nick: Yeah. They do, just general information. There would be some general information. Also, as I mentioned before, on the money gov website there's information about; Trudi: Money smart. Nick: Sorry. Yeah. Money smart.gov.au Sarah: They're not going to give you any specific advice pertaining to your personal circumstances though, you have to actually engage a financial planner and pay for that advice. Nick: Definitely, you'll need to; and especially if you've got that much money, you definitely need; there's a lot of things that have some extra benefits for you to get actual advice as well. Sarah: Yeah. If you're in the fortunate position of having that much money in your Superfund, yes. Trudi: Nick, any last words or any last things that you'd like people to know about their super? Nick: Definitely super; as long as; there are restrictions with regards to accessing the funds, but the way I look at it, you've got some really; you don't pay as much tax as well, so it's consensual pretty good in that regard. So that's the benefits about it. So definitely do look at your statements each year, look at how the money's invested, and then get advice as well, just in regards to it, to look at the ins and outs of it as well. Get tax planning with your accountant in regards to minimizing your tax as well. So yeah, Sarah: Completely. Well, in our next episode, we're actually talking about self-managed Superfund. So, guys, you may see a theme rolling out through the season this year, but it's deliberate because these are the questions that we probably get the most. Trudi: Yeah, definitely. Nick: Definitely. Sarah: So, until next week then guys, you've been listening to financial FA FU Trudi: I'm Trudi Cowan. Sarah: I'm Sarah Eifermann and we've had special guest, Nick Zahra, with us today. Nick: Thank you. Trudi: Thanks.———————-
Just two industry experts (and guests) having a friendly chat and sharing our knowledge. We aim to raise your knowledge base and dis-spell any myths surrounding finance. tax and a range of other financial topics.
This is a safe space to ask questions and hear useful info on financial matters.
Read more about FOFU here
And, as always if you'd like to leave us a message, or suggest a topic, you can do so here
———————-
DISCLAIMER- The information and material in this podcast, and supplementary and associated information available, is for general information only. It should not be taken as constituting professional advice from the podcast owners, and we recommend you seek independent suitable advice that is specific to your unique circumstances.