15 Things People In Their 30s Should Know About… Superannuation

If there’s a list of the top five government initiatives in Australian history, superannuation has to be near the top.

Medicare. NDIS. Our welfare state. These are things I believe we should be proud of in Australia.

Superannuation is the same.

It’s an incredibly powerful beast that we’ve built in a fairly short period of time, and it should guarantee all working Australians a dignified life in retirement.

What a wonderful initiative! Historically speaking, it’s not that long ago that our aged, infirm and retired would have to rely on the goodwill of charities to wait out the final years of their lives.

Fair to say, I love superannuation.

But.

I do think they could do something about how complex it is!

Because I’m sure that most of the disconnection people have from their superannuation stems from how hard it is to actually understand how it all works.

Which is why I’ve written this list for people to get across how their superannuation works. Especially when you’re in your 30s, when it starts to become a really sizeable part of your financial situation.

Without further ado, here's a list of key things that people in their late 30s should know about superannuation:

1. Superannuation is a Structure, NOT an Investment

The ‘superannuation fund’ you have – with AustralianSuper, or MLC, or Rest, or whatever – is an ownership structure. The trustee of the fund holds the assets within that structure on behalf of the members.

A lot of people slightly confuse things though, by referring to the investments within the fund as the super fund.

A minor distinction without a difference, maybe, but this is something worth noting, because getting money into the superannuation structure is one issue with different tax, legal and compliance consequences.

But once it’s in the structure, you can change how it’s invested, move it around and even change super funds pretty easily.

Think of it as an ice cube tray – the tray itself is the ‘superannuation fund’, while the different cubes are the investments.

2. Mandatory Contributions

In Australia, employers are required to contribute to your superannuation fund on your behalf. These payments must be made quarterly, though most employers tend to make the payments more regularly.

This contribution is known as the Superannuation Guarantee (SG). It's currently set at 11% of your ordinary earnings but is gradually increasing to 12%, though the amount of income they must pay this on is capped (at $249,080 a year currently).

3. Salary Sacrifice

Employees have the option of ‘sacrificing’ part of their salary into their super fund. This means diverting a portion of your pre-tax salary into your superannuation account.

Generally it involves contacting your Payroll or HR department and asking them to set it up for you (there’ll probably be some paperwork – there’s always paperwork with super).

The way it works is that you sacrifice an amount of your pre-tax income. Let’s say you sacrifice $1,000 of your pre-tax income. And let’s assume you’re earning $100,000 a year before super.

If you kept that as salary, you’d pay $325 tax on that and keep $675.

But if you put the $1,000 into super, you lose that $675 of income.

Yet $1,000 goes into super, you pay $150 in contributions tax and $850 lands in your super fund.

So you’re $175 better off in this scenario.

Of course, you can’t access this money, but if you do this for long enough, you’ll see some significant savings along the way to growing a much bigger nest egg.

4.   Personal Contributions

You can make personal contributions to your super fund from your after-tax income.

These are called ‘non-concessional contributions’ and you’re limited to how much you can put in each year.

The other type of contributions are ‘concessional contributions’, or pre-tax ones like Superannuation Guarantee and Salary Sacrifice.

Depending on your balance, you can bank up a few year’s worth of unused cap and put a big chunk in. This is a complex area though, so seek advice before doing anything.

You may be eligible for a government co-contribution, which can help grow your super balance.

5. Tax Benefits

Superannuation contributions are generally taxed at a lower rate than your income.

And when you retire and convert the funds into a pension, that tax rate can fall to 0%.

Contributions are taxed at 15% (or 30% for high earners), and investment earnings are also taxed at a concessional rate.

These tax benefits are the primary reason to use superannuation to accumulate your retirement savings and have been put in place by government to encourage exactly that.

6.  Contribution Caps

Be aware of contribution caps, which limit the amount of money you can contribute to your super without incurring additional tax.

These caps include the concessional (before-tax) and non-concessional (after-tax) caps.

The non-concessional cap is $110,000 a year, or you can bring forward several years’ worth to put $330,000 in.

While concessional contributions are capped at $27,500 a year.

7. Investment Options

Super funds offer a range of investment options, from conservative to high growth, property to individual shares, or even more sophisticated investments via a self-managed superannuation fund.

Review and choose the investment strategy that aligns with your risk tolerance and retirement goals.

8. Consolidating Superannuation Funds

Over the years, you may have accumulated multiple super accounts.

Many people think consolidating them all into one fund will automatically save fees. This can be the case, but tread carefully. Consolidating funds can mean inadvertently losing other benefits – like insurance, or certain disability timing issues – that far outweigh the dollar saving.

Also, say you have three funds, each with $40,000, that are all charging 1% a year in fees.

Regardless of if you have one or three funds, you’re always going to pay $1,200 in fees across those accounts.

The reality is far more nuanced than this, so definitely seek advice BEFORE making any changes, because often any issues that come from consolidating super are irreversible.

9.  Insurance

Most super funds offer life and disability insurance.

Review your coverage to ensure it meets your needs and consider whether additional insurance is necessary.

10. Preservation Age

The preservation age is the age at which you can access your super.

It varies depending on your birthdate but is generally between 55 and 60.

Understanding your preservation age is crucial when planning your retirement.

11. Beneficiary Nominations

Make sure you've nominated beneficiaries for your super fund.

This ensures that your super is distributed according to your wishes in case of your passing.

Of course, how the funds are paid upon your death is a bigger issue with some real problems coming to the fore as superannuation becomes a larger part of people’s estate.

Between insurance and the balance, it’s not unusual for these funds to have six-figure balances, even for younger people. But when they pass away, the bureaucratic nonsense their family has to navigate is taking on nightmarish tones.

This issue is becoming increasingly prominent – the ABC in particular is highlighting just how awful it can be.

Having a formal nomination is the best way to minimise the chances of your family going through this, so be sure to update them right away.

12.  Fees and Performance

Regularly review the fees and performance of your super fund.

High fees will eat into your returns, and poor performance can impact your retirement savings.

As a guide, there are generally three layers of fees within a superannuation fund:

a.       Administration Fees

These cover ‘doing the books’ and all of the other expenses that come with operating a fund – getting the tax returns and financials done, staffing the call centre, the website, etc.

b.       Investment Fees

The costs that come with investing the money – paying for the investment managers, and ongoing costs.

c.       Advisory Fees

An optional expense, these are the fees you can choose to pay a financial adviser for assistance with your superannuation. You can pay the portion of your advisers fees that apply to your superannuation via your superannuation.

13. The Role of Professional Advice

If you’re looking for help with your superannuation, there are a few different options.

You can call the fund itself and ask them specific questions about the fund itself, or your account.

If you’re looking for broader advice about whether the fund is a good fit for you, then speak with a financial adviser.

Your fund might offer financial advice, but be sure to ensure that their advice is in your best interests (are they going to tell you that the fund they work for isn’t a good fit?).

An external adviser can be a good option, though there will be fees and costs involved. They can provide personalized advice based on your financial situation and retirement goals.

14. Estate Planning

Include your superannuation in your estate planning.

You may need to specify how you want your super to be distributed in your will or through a binding death benefit nomination.

This is an area to get some advice, because there are different tax and compliance consequences depending on how it’s structured.

For instance, there can be a different tax rate applied if the fund goes to the beneficiaries directly, or via your estate.

15.   Long-Term Perspective

Remember that superannuation is a long-term investment. Don't panic during market fluctuations, and avoid making hasty decisions based on short-term market movements.

Superannuation is a crucial part of your retirement plan in Australia, and taking an active interest in managing your super can make a significant difference in your retirement lifestyle.

By staying informed and making better decisions, you can work towards a more comfortable and financially secure retirement.