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Unpack your Super

May 22, 2020

 

Superannuation - Do you cringe when I talk about the importance of building your super?

 

Let me unpack it for you and simplify it - what is it, how it works, and why it's so important for you to understand it.

Compulsory superannuation came into effect in Australia in 1991 with the introduction of the Superannuation Guarantee – a compulsory contribution system, paid for employees by employers.

The current amount of super that your employer has to pay is 9.5% of your income.

Superannuation is designed to assist you to build funds so you can draw a pension in your retirement. Building an adequate superannuation balance will allow you to be a self-funded retiree and live life on your own terms, it also reduces the pressure on the government to provide old-age pensions - which many of us are not going to get anyway.

Superannuation is complex there are so many laws and regulations, but once you understand it and start to implement some of the strategies, overall it is a great vehicle for you to start investing for your retirement and doesn’t matter what age you are.

Building superannuation is really important for women as, on average women retire with 47% less super than men… Gender Gap Alert!!  Women take time off to raise children and women are usually earning less than men.

Let's talk about contributions - there are 2 types of contributions, concessional and non-concessional.

Concessional contributions are the contributions that your employer makes, this is capped currently at $25,000 per annum and are taxed at 15%. So for every $1,000 you contribute to super you pay $150 in tax.

Non-concessional contributions are after-tax funds, that you are able to contribute. Where could this money have come from…. a sale, inheritance, extra saving you have, basically any extra money that you have lying around. The cap for this is $100,000 per annum, or with some clever strategy work you can make that $400,000 over 3 years – but this is secret financial adviser business.

The biggest positive about super is that when you retire and your superfund becomes a pension fund, the pension income you draw becomes tax-free, that’s 0%. That's why it's important to build your super from an early age.

 

Have you ever looked at big office blocks and towers and thought I wonder who owns that... Well it could be your superfund. Your superfunds are invested in what is called a diversified asset allocation of funds. 

What that means is that your money is invested in different types of assets. Assets can be either growth assets or defensive, safe assets.

Growth assets are things like shares & properties. These assets are likely to return you more, however also have more risk associated with them.

Defensive and safe assets are cash, fixed interest or government bonds, these assets have less risk, but have less return as well.

Every superfund is invested differently according to their own investment principals. They will all have some of the same investment, usually the main blue chip shares in both the Australian and international markets. But they will also have their individual preference of shares, property and unit trusts that are specific to them. The portfolio mix or percentage invested in each asset class will also be different according to the overall risk of that portfolio.

You need to know that your super is your money, it's just held in a different entity for you till you can access it at retirement. Because it's your money, it's important for you to understand how your super is invested. If you haven’t got access to your super online, that's your job today to find out how to get access to view your super online. Have a look at your balance, your investment, download the investment guide and have read it will tell more about your investment. It's also important to ensure that your super is also invested according to your risk profile or your attitude to risk and if you if it's all too difficult consult a financial advisor and get the help. 

Now that you understand your super, you also need to understand the magic of super is the power of compounding. What that means is that when you have funds invested, the earnings that are earned are added to the principal amount which then continues to compound, to grow and return you more.

Now I know what you're thinking. Have you seen my super balance in this COVID19 epidemic? Yes, I have and I know it's scary. But history shows us that when the market recovers and it will… your super will keep growing and be better than what it was before.

During the epidemic the government has also made a decision on the run that people affected by COVID19 can withdraw up to $20,000 of super over 2 years. My personal opinion on this is that unless you are genuinely affected by COVID19 and have no other funds available, you should not be touching this money. A person who is 25 today and withdraws $10,000, it could end up costing them over $200,000 in 40 years when they retire, that's the power of compounding.

First of all there are rules you need to meet to withdraw your funds and one of them is having no income and being genuinely affected. Second, if you withdraw the funds dishonestly which we have heard many stories about… especially to use as a deposit towards a house.. you will get caught and be fined heavily. Super is regulated by the ATO so when you lodge your tax return and they match your income and will see you withdrew your super – you will be caught out… believe me the government knows everything about you. You may think that this was a sweet carrot being dangled in front of you for a way to access some extra funds, don’t take the bait.. it's not worth the risk. 

The other reason also to not withdraw or touch or super at the moment is because anything you do now will crystalise the losses that you may currently be seeing. The market will recover, it just needs time.

I hope that this article has helped you learn a bit more about super and if you have any questions or comments in regards to this topic feel free to contact me at fairien@financiallysavvy.com.au 

Fairien

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