Superannuation
Since the mid 1980’s every worker in Australia has had money invested into a
Superannuation Fund by their employer to fund (or help fund) their retirement.
The fund that employers deposit into on behalf of the employee can either be:
• Managed by the employee themselves under strict rules imposed by ASIC
If you have your own Self-Managed Superannuation Fund your employer can
be instructed to deposit the contributions they pay as part of your wage, into
your fund.
• A third-party fund chosen by the employee
If you do not have a Self-Managed Superannuation Fund you can set up an
account with a Registered Superannuation Fund and have your employer
deposit their contributions into that fund.
• A third-party fund chosen by the employer
If you do not choose a fund or do not give your fund details to your employer,
your employer is required to set up a fund account for you on your behalf so
they can deposit their contributions into it.
You should talk to your kids about Superannuation as it is a fund set up to
accumulate wealth for their retirement. If they do not know about it and they take
no interest in it, it will not deliver the results it otherwise might do.
The Magic of Compound Interest
If you make a point of talking about Superannuation with your kids starting from an
early age, they will be much more likely to be interested in what happens to their
Super contributions when they start work and throughout their working lives.
This is after all, their ‘wealth account’ and you want them to be excited and
interested in making it the best it can be.
At a time that you think your kids will be interested, it would be well worth
explaining the magic of compound interest to your kids. The institute provides a
Wealth Planner Spreadsheet. Go to
www.spendingplannersinstitute.com/calculators/wealthplanner.xls You can use
this planner to test out different savings scenarios.
For example, if you were to simulate a 17-year-old who deposits $50 a week into a
fund that returns an average of 8% for the 50 years to retirement age of 67, you will
see the projections show they will have accumulated around $1,600,000.
If they were to continually adjust the deposit amount upwards in line with inflation,
the end sum will also increase, decreasing the effect of inflation.
Seeing this may well help your kids to take interest in their Super Fund and the
practice of Saving and Investing regularly both through their Super Fund and outside
of Super.
Home Super Saver Scheme
There are very few situations where you can withdraw money from your
Superannuation Fund before you reach retirement age, but the government recently
introduced the ‘First Home Super Saver Scheme’ that your kids should definitely
know about.
This scheme is designed to help young people save faster for their first home deposit
by allowing them to voluntarily deposit regularly into their Super Fund (taxed at only
15%) for the purpose of accelerating the saving of a deposit for a home, and then
withdraw the money from their Super Fund to use as the deposit for a home they
will live in. Once again there are rules, and you should help your kids get the right
advice on how to take advantage of this scheme, but because of the low tax rate this
will help them to save a deposit faster.
Other Stuff Mums and Dads Should Know
Multiple Accounts – People who have changed employers many times and who have
not bothered to give fund details to subsequent employers may have many
Superannuation Fund accounts that were set up by each of their employers.
Each of these Super Fund accounts will be charged management fees by the fund
manager, so it is very inefficient to have multiple Super Fund accounts.
Superannuation laws are being ‘tweaked’ regularly by governments and changes
recently introduced should stop people from losing money though having multiple
and inefficient funds that do not generate sufficient growth.
Voluntary Contributions – If a person wants to voluntarily contribute some of their
income to their Super Fund, they can have this taken out of their ‘before tax’ income
and the contribution is then taxed at 15% in the Super Fund rather than at the rate it
would have been taxed at if it was received as wages (which may be as high as 45%).
If a person chooses to contribute to their super fund with ‘after tax’ income, the
money they contribute will not be taxed in their Super Fund a second time. If they choose to contribute with ‘after tax’ income, the government may make a tax free
co-contribution of up to $500 (as at the time of writing), into their Super Fund
account.
Get Advice – There are many rules relating to Superannuation and Tax and how much
you can contribute and at what ages you can contribute and withdraw, so it is
imperative that you get advice from a Financial Advisor in relation to your retirement
goals. Knowing how Super Funds work will make you more able to help your kids, so
it is well worth it to take interest and get advice if for no other reasons than to help
them have a better retirement nest egg growing for their later years.
By the time your kids reach adulthood they should know…
• What a Super Fund is
• The purpose of a Super Fund
• That they will have a Super Fund when they start work
• Their employer will be depositing money over and above their ‘take-home’
pay into their Super Fund each time they get paid
• The government wants their Super Fund to grow quickly so it is taxed at a
lower rate than they are personally
• The money in their Super Fund is (generally) ‘locked in’ until retirement age
• There are heaps of different funds with different investment strategies and
they all get different results. Some earn more for their members and other
earn less.
• They can choose who they will have their super account with
• All Super Funds charge fees to manage and invest the money to make it grow
Most Super Funds include Life Insurance for the members and the premiums are
deducted from the money in the fund.
