Understanding superannuation: A Glossy Glossary
07 December 2015
Putting your money into a retirement fund might seem a little daunting, with a complex range of investment options, terminology and regulations.
However, building a strong superannuation balance can help you live a comfortable retirement, so it’s important to understand what it is, and how some of the key features can help you progress.
To help you out, here is a glossary of common terms you might encounter when researching your super fund and reviewing the options available through Virgin Super. It’ll have you understanding superannuation in no time!
1. Contributions
Contributions are the ways in which you bolster your super fund. While your balance is designed to grow through its investments (see Investments section below), you are likely to top up your balance through at least one of these contribution types:
Concessional contributions
A concessional contribution is a contribution which is made from your salary before tax. A concessional contribution is taxed at 15% once it is deposited into your super account. There is a limit to how much you can contribute to your super as a concessional contribution in a financial year, otherwise known as your concessional contributions cap (see definition below for more details).
- Super Guarantee (SG) or Employer Contributions: There are many terms used to describe SG Contributions, but what you need to know is that your employer is legally obligated to contribute a specific amount to your Super account based on your gross salary (Note: Your gross salary is your salary before tax is deducted).This is known as the Super Guarantee amount and is currently set at 9.5% of your gross salary.
- Salary sacrifice: Another option is what is known as salary sacrifice. This is when you voluntarily ask your employer to pay some of your future gross salaries into your super account over and above your SG amount. Super contributions made in this way are taxed in your super fund at 15% (as long as they fall below your concession contributions cap – see below), which is usually less than you would pay if the money was taken as a salary. Note: If you earn more than $300,000 in a financial year, you may need to pay an additional 15% tax on your super contributions.Speak to your employer to find out if they offer this plan. If you are considering salary sacrificing arrangements, you may wish to speak to a financial advisor.Note: Where you make a contribution to your super and subsequently claim a tax deduction, this has the same effect as a salary sacrifice contribution and will impact your concessional contributions cap.
- Spouse: If you have a spouse that earns less than $10,800 per year, you can opt to make contributions into their super account. You will need to be married or in a de-facto relationship.
Non-concessional contributions
Non-concessional contribution is akin to paying for everyday goods from your wallet with after-tax money. Because it comes from money that has already been taxed, there is no tax deduction from the contribution when it is deposited into your super account (the government does not charge you tax twice). There is a limit to how much you can contribute to your super as a non-concessional contribution in a financial year, otherwise known as your Non-Concessional Contributions Cap (see definition below). The main form of non-concessional contribution is a personal contribution.
- Voluntary (or Personal): You can pay money directly into your super fund from your take home pay or savings. This simply means putting some money into your account from your own pocket. Note: If you make a personal contribution and you subsequently claim a tax deduction for this contribution, it is treated like a salary sacrifice and will impact your concession contributions cap.
Contribution limits
Concessional contributions cap
This is an upper limit on the amount of before-tax contributions you can make to your Super fund each year, as set by the Australian Taxation Office (ATO). After you reach this limit, you will be taxed at your marginal tax rate for contributing more funds. Alternatively, you may be able to have any contributions in excess of the concessional cap refunded.
For 2014-15, the current limit for the concessional contributions cap is $30,000. If you were over the age of 49 as of mid 2014 then it is instead $35,000 – allowing you to contribute more as you draw closer to retirement age.
Non-concessional contributions cap
This is an upper limit on the amount of after-tax contributions for which you do not claim an income tax deduction. For 2014-15, the amount of this cap is set at $180,000. Speak with a financial advisor or accountant if you are close to this amount, as penalties may apply if you go over the cap in a given financial year.
2. Insurance
Most (but not all) superannuation funds will provide an automatic level of life insurance cover for members, otherwise known as default insurance. In fact, for many funds it is a requirement of law that they provide members with default insurance cover. In addition to this, most super funds will offer members tailored insurance options. Whether you have default or tailored insurance, there are generally three types of insurance options in super, namely:
- Death cover: This offers a lump sum payment to a member’s beneficiaries upon their death or, depending on their policy, may offer a terminal illness payment when it is diagnosed that the member will pass away within 12 months.
- Total and Permanent Disablement (TPD) cover: This typically provides a lump sum payment in the event of a disablement that prevents you from working. Note: there is some tricky definitions of what it means to be permanently disabled and being prevented from working. It is worth familiarising yourself with your superfund insurance guide and how it defines Total and Permanent Disablement.
- Income Protection (IP): This will typically pay you a percentage of your gross salary in monthly payments should you be unable to work after a set period of time. Depending on the policy, Income Protection payments may be capped to a maximum time period. Virgin Money also offers Income Protection Insurance as a standalone product, outside of your superannuation account. Speak to your financial planner if you are considering your income protection options.
As with all insurance products, these will come with distinct terms and conditions, so be sure to review the level of cover your superannuation fund provides and speak to a financial advisor when deciding on the right balance for you.
If you want to understand more about the packaging of insurance and superannuation, Virgin Money’s Christopher Sozou wrote a thought-provoking commentary on this subject.
3. Investment
A superannuation fund isn’t just a big bank account where money sits until its ready for you. Your money is carefully invested and administered in order to grow it ready for your retirement.
Most superannuation providers offer different investment strategies based on your objectives and investor profile. Some common strategies outlined on the MoneySmart website include:
- Growth: Invests around 85% in shares or property, aiming for higher, long-term returns
- Balanced: Invests around 70% in shares or property, and the remainder in fixed interest or cash, aiming for reasonable returns but with less risk of losses in bad years.
- Conservative: Invests around 30% in property or shares, with a majority in fixed interest or cash, aiming to reduce the risk of loss at the expense of a lower potential return.
- Cash: Invests 100% of your funds in Australian deposit-taking institutions, while aiming to guarantee your capital.
The investment mix within each strategy, and even the names used, may vary across different superannuation providers, so check the investment breakdown and assets included in each category.
With any of these strategies, speak to your financial advisor to determine the best solution for your current situation.
To illustrate how these strategies can be deployed differently, let’s look at Virgin Super. There are two investment options on offer; one that is automatically adjusted through Virgin Super Essentials, or invested as you choose with Virgin Super Plus.
- Automatic: With Virgin Super Essentials, your funds are invested in pre-mixed options, which automatically adjusts as you get older. This is called the LifeStage Tracker® – Balanced program. This program begins investing in growth assets when you first start out in the workforce, but moves to a more defensive strategy for more stability as you near retirement age.
- Your choice: Alternatively you could invest your money where you choose to. You can select your blend of international shares, Australian shares, property, or cash and fixed interest. With Virgin Super Plus you can choose between LifeStage Tracker® – Balanced, for the same defensive benefits, or LifeStage Tracker® – Aggressive, which invests higher percentages in growth assets for longer.
You’re not stuck with just one program, however. If you like, you can change between Virgin Super Essentials and Virgin Super Plus at any time you like, depending on how you see the market going and your personal preferences. Simply pop online to your Super Account or fill in an Investment Option Form.
For Virgin Super Plus members, swapping between investment options is just as easy, and can also be done from your online account.
4. Rollover
For individuals who have more than one superannuation fund, or decide to change providers, a rollover may be required. A rollover is simply the act of moving money from one super fund into another. The act of rolling over your super is also known as consolidation, and could provide benefits to your overall superannuation portfolio.
If you are thinking about altering your superannuation portfolio, it might be wise to speak with your financial advisor.
Do you feel armed with more knowledge about your superannuation fund?