Managing your super.

Hi, I’m Bronwyn Lawson from Westpac’s Davidson Institute, here to talk to you about ‘Managing your super’.

Superannuation is arguably one of the most important financial investments you’ll have in your life however many people don’t think of their super as something they can manage and control and make the most of. Whether that’s because … it’s money from their pay that they just don’t see … or because it can’t be accessed until you retire and that just seems too far in the future to worry about … or because it just seems too confusing … it’s time we started to take more notice and take better care

of our financial future. So, what are we going to cover in this video? Firstly, we’re going to get back to basics and look at simply “What is Super?” Then we’ll look at the key things you should know about your super. Then some of the actions you can take to get on top of your super.

So, let’s get started with “What is super?” In a nutshell it’s simply tax-effective savings for your retirement. It often seems much more complex than this due to the amount of legislation that surrounds it, and the fact that this legislation seems to be constantly changing. I think that many people feel that it’s somewhat out of their control & a bit of a mystery, and so don’t give it the due attention it deserves.

My aim today is to share some information to help dispel that air of mystery and get you motivated to take a more active interest in your super, because it is going to be the key to having the long term financial future you want. So, why do we have superannuation?

Put simply, it’s to encourage people to save for their retirement and reduce the reliance on the age pension. Our aging population means that this is a significantly increasing cost for the government and while back in the 1950’s there were 16 workers (generating income for the government) for every social security recipient … this has dropped to 3.3 today, and the expectation is that it will be reduced to 2 by 2030.

And, possibly due to our healthier lifestyles, people are living longer than they used to. In the 1950s, Australian men usually lived about a decade after they finished full-time work and women a few years longer. Nowadays the average Australian man stops working at just over 61 and lives to around 84 – that’s 23 years in retirement as opposed to 10! The average woman stops working at 58 and lives to around 87 – that’s nearly 30 years in retirement.

So, they are some of the reasons we need to become more self-funded in retirement. The other is that for many people the age pension, if available, just won’t be enough to provide the lifestyle they want. Let’s have a look at how the maximum age pension stacks up against the cost of a comfortable lifestyle, as defined by ASFA. ASFA stands for the Australian Superannuation Funds Association and they regularly publish their Retirement Standards report which is based on the actual current spend of

retirees. As of December 2019, their cost of a comfortable lifestyle for a couple was $5,189 per month, or $3,679 for a single. Now if we compare that with the current maximum age pension of $3,084 for a couple and $1,973 for a single we can see there are significant gaps.

The definition of a comfortable lifestyle though isn’t luxurious, but it does allow for some entertainment, replacement of assets like whitegoods, furniture, or cars, and private health insurance – all of which would be pretty important to me in my retirement. Bear in mind too that these figures assume outright ownership of a home – there’s no allowance in these figures for loan repayments or rent.

So, in reality we have a very finite time during our working lives to pay off our home and save enough to live off for the rest of our lives. So, for the comfortable lifestyle we just looked at, how much would we need invested to generate that amount of income each year … for the 20 to 30 years we will be in retirement?

To generate an income of $5,189 per month to fund a comfortable lifestyle which works out to be $62,268 annually, and assuming a return of 7% per annum, $889,500 would need to be invested. More than you expected? At least now we have a ballpark figure of where we need to aim.

We’ve used a 7% return here however in your own calculations you might like to use a different rate of return, based on your own investment strategy. As I said, this is very much a ballpark calculation, for more accurate calculations you can use a retirement income calculator. BT Financial Group have one on their website, as does MoneySmart. I’ll share these links with you later in the video.

Our superannuation is where the bulk of this money invested will be accumulated so how does it actually work? It’s as simple as ‘Money In’ less ‘Money Out’ equals your retirement benefit.

The money that goes into your super comes from a number of sources. There’s the superannuation guarantee payments from your employer – we’ll look at that in a little more detail shortly. You can also make your own contributions and we’ll have a look at some of the benefits of doing that soon too. And of course, there is the earnings from your super investments.

The money that may come out of your super is any fees that the fund provider charges, taxes on your contributions and earnings, and sometimes, if you have insurance in your super (and yes, we’ll look at that soon too), the premiums that will be deducted from your super balance. What’s left is the money you have to support you in your retirement.

So, what are the important things you need to know about your super? Today I’m going to approach the ‘what do you need to know’ from 3 perspectives. You need to know about Money In. How much is going in, where from, and where it is. Then you need to know how that money is being managed while it’s in your super fund. And finally, how do you get it out?

The majority of the money that goes into your super fund will come from the super guarantee payments from your employer. When you are working, your employer is required to pay a certain amount of your salary into your superannuation fund for you. This is known as the Superannuation Guarantee and at the moment it’s 9.5% of your salary … so it’s a significant amount. Therefore, it’s important to also know where your superannuation is being saved.

Some people who have changed jobs a number of times have a number of superannuation funds and don’t necessarily know where all their super is. In fact, there is quite a significant amount of unclaimed super … currently somewhere in the order of $12 billion … just waiting for its owner to come and claim it. It’s a good idea to have just one super account and to provide those details to your employer if you change jobs. This will mean it is all in one place and you’ll only have one set of fees

and insurance payments too. You can also make your own contributions to your superannuation up to certain limits, but remember this money is for your retirement so there are restrictions on when you can access the money – don’t tie all your savings up in super. There are a couple of different ways you can make your own contributions, and each has different benefits.

Firstly, to encourage people to make their own contributions to super the current legislation allows us to make pre-tax contributions … that is payment from your salary before tax has been deducted. This is known as salary sacrificing. This has a number of benefits … these contributions are taxed at 15% as they go into your super instead of the income tax being calculated at your marginal tax rate. It reduces your taxable income which potentially reduces the amount of tax you pay too.

Let’s have a look at an example of how salary sacrificing works. Starting with a normal scenario. For example, you get paid $75,000 which is taxed at your marginal tax rate, and you end up with an amount to take home. Now let’s say you’ve had a good look at your cash flow and your savings goals, and you’ve decided that you want to salary sacrifice $5,000 a year to your super.

You continue to pay tax on the balance of $70,000 at your marginal tax rate, however the contributions to your super are only taxed at 15% - meaning that overall, there is less tax paid. While your take home pay is a little less – a bit over $3,000 – you have contributed $4,250 to your super. Your final net position is improved but it’s a delayed benefit because you can’t access the additional money until you can access your super.

Talk to your financial advisor about whether this might be beneficial for you but remember there are limits on the amount you are able to contribute in this concessional environment. For lower income earners there are also benefits if you make your own after-tax contributions or make contributions on behalf of your spouse. See the ATO website for eligibility criteria or talk to your financial advisor.

I mentioned earlier that there is a significant amount of ‘lost’ super waiting to be claimed. If you have changed jobs, moved or changed your name, then some of this may be yours! If you think you may have some lost super track it down. It’s a relatively easy process through most banks now. Westpac customers can do this in Westpac Live, their online banking platform, in a matter of minutes.

Then finally the earnings from your super investments continue to contribute to your super. So, understanding where and how your money is invested also means you can work towards maximising this as well. So that brings us to the next thing you need to know about your super and that’s how your money is being managed.

There are a number of different types of super available depending on how much time and effort you want to put into managing your super and maximising the income from your investments. Some people have little interest in their super fund and are quite happy to have someone else manage it on their behalf. The My Super funds are well suited to these people.

The management of the fund, including investment strategies, are dictated by legislation and there is limited choice for the owner/beneficiary of the fund when it comes to how their money is invested and managed.

Others, while being happy to have their funds managed by a professional, want to have more control over the investment strategy. A Super Wrap style of fund allows the owner/beneficiary to select the way they want their funds invested.

For example, they may elect to have a higher risk strategy and invest a greater percentage of their money in the higher returning international shares and a lower percentage in less riskier cash investments however as their needs change they can adjust this strategy but still have the advantage of an expert managing the investments for them.

To use this this style of super effectively there is a little more time and effort required than for a My Super fund. A self-managed fund on the other hand requires the most time and effort, but also gives the greatest level of choice and control. There are more investment options available and much greater flexibility to move money to different investments as opportunities arise. So, think about where you might be on this continuum and which style of super would work best for you.

To use this this style of super effectively there is a little more time and effort required than for a My Super fund. A self-managed fund on the other hand requires the most time and effort, but also gives the greatest level of choice and control. There are more investment options available and much greater flexibility to move money to different investments as opportunities arise. So, think about where you might be on this continuum and which style of super would work best for you.

The money in your superannuation account is of course invested to earn more money. Most commonly these investments are managed by your superannuation company, but as we just saw with the Super Wrap and SMSF options you can have a say in how they are invested if you wish.

When you’re younger you may wish to have more invested in higher earning but riskier investments however as you get closer to retirement you’ll want to protect your investments and will likely use less risky investments that may not earn you as much return.

But what’s the difference between investing within super or outside of super? Given you can’t access the money in your super until you retire why would you choose to lock it away? Let’s have a look at some of the differences.

When you invest outside of super: • You have a reduced amount to invest as your income has been taxed at your marginal tax rate. • Earnings on the investment increase your taxable income and are taxed at your marginal tax rate • You may incur capital gains tax when the investment is cashed out.

Conversely when you invest within super: • Your salary sacrificed contributions are only taxed at 15% so you have more to invest • Personal after-tax contributions may also be eligible for a government co-contribution • Tax on earnings is 15% • Investments cashed out after the age of 60 are tax free. If you have insurances in super, there are benefits as well – which we’ll cover shortly.

So, there are definitely advantages investing in super as long as you don’t need to access the money prior to retiring. Another thing to be aware of while your money is being managed is the costs to do that. Your superannuation company will charge you fees for managing your money. When you select which company you’ll use for your superannuation, it’s important to compare the fees.

Keep in mind though that some companies while they may charge higher fees, they may be providing you with more comprehensive service or potentially earning you more income on your investments. It’s not always better to go with the cheapest.

And in terms of taxes … all contributions and earnings are taxed but at 15% not your marginal tax rate. We’ve already mentioned that some funds provide for having insurances within the fund too. The types of insurances that may be available are Life, Temporary and Permanent Disablement, and Salary Continuance. The benefit of having these insurances in your super are that the premiums for the insurance come out of your superannuation contributions instead of out of your pocket.

I often find that people are unaware that they have Salary Continuance (or income) insurance in their super because they had forgotten that they ticked the box when they set up the account. Similarly, when people have multiple super funds, they may have forgotten about the various insurances set up within those funds. This can lead to unnecessary duplication meaning that you could potentially be paying for more insurance than you actually need – which in turn reduces your super fund.

So, once we understand what money is going into our super and how that is being managed, then the final things to know about your super is how and when you can take the money out. As I said earlier, superannuation is savings for your retirement and as such is preserved or saved until certain conditions have been met.

You can access your super savings: • At retirement age – currently 65 – even if you haven’t retired • When you reach your preservation age. Your preservation age will vary according to your year of birth, unless you were born after 1 July 1964, in which case your preservation age is 60. More information on preservation ages is available on the ATO website.

The third way you can access your retirement savings is under the Transition to Retirement Rules. The first 2 there are fairly self-explanatory but let’s have a closer look at Transition to Retirement or TTR as it is known.

Not everyone wants to completely retire, preferring to gradually reduce their working hours but staying active in the workforce. But of course, reduced hours also means reduced income which is where Transition to Retirement comes in. Introduced in 2005, the transition to retirement rules aim to help people make a smooth transition to life after full-time work.

Once you have reached your preservation age, that is the age you are able to access your super funds, a transition to retirement strategy allows you to start drawing regular income from your superannuation. This income is concessionally taxed instead of being calculated at your marginal tax rate. This income can then be used to maintain your current level of income but work reduced hours or can be used to increase the amount you are salary sacrificing to super without reducing your income.

As with most things in super there are very strict rules around eligibility, the amount available, and the taxation requirements so make sure you speak with your financial planner about whether a TTR strategy may work for you.

The other trigger for the money in a super account to be released is the death of the owner of the fund. On the death of the owner of a super fund, the trustee of the fund determines where the monies will be paid to. This is often a dependent of the fund owner such as a spouse, child or financial dependent. If there are no super dependents it goes to your estate.

Some super funds allow you to nominate your beneficiary. A non-binding nomination is basically a suggestion to your trustee, but a binding nomination is just that – binding. That’s how the trustee must act. Check with your super fund about nominations – after all you want your super to go where you intend it to instead of someone else.

There are a number of other limited circumstances where you may be able to access part of your super prior to retirement. Things such as … if you are in severe financial hardship such as your lender being about to foreclose on your mortgage, or you have urgent medical expenses in relation to certain illnesses. VERY strict eligibility rules apply in these cases, both in terms of the evidence you must provide and how much you can withdraw,

so your superannuation should only be seen as an absolute last resort. The other instances when super may be released before retirement is where a temporary resident who has been receiving super guarantee contributions permanently departs Australia. Again, there are very specific requirements to be met in this regard.

So, we’ve covered a lot of information today in quite a short period of time. But, WHAT do I want you to do with your new-found knowledge? There are 5 things that I want you to find out about your super. What is the balance of your super? How much do you have saved at the moment?

How many super accounts do you have? Are you possibly the owner of some of that ‘lost’ super we mentioned earlier? If you have more than one super fund it might be a good idea to consolidate them as its easier to manage if it’s all in one place, and you’ll only have one set of fees reducing your savings.

The only proviso to this is, if some of those funds have insurances that you may not be able to get any more, in which case you might make the decision to keep a small amount in the fund to retain the insurance cover. Remember though that the fees for the insurance will continue to come out of the fund.

Have a look at how your super is invested. Is it earning you a reasonable return? and is it invested appropriately for where you are on your financial journey? Check too what sort of fees you are paying. Have you ever thought to compare different funds? And do you get value for money in terms of the returns your investment is achieving and the service you get from the super company?

Finally, check what insurances you have in your super. In fact, do a complete review of all your insurances to check not only whether you may be underinsured, but whether you may be over-insured and paying more than you need to. Once you have found out those 5 things, I hope you’re then motivated to more proactively take care of your super. Unless you are good to it now, it’s not going to be good to you when you need it … when you retire.

To find out more information you can visit • The Westpac personal superannuation page, or • The BT Financial Group personal superannuation page • The government’s MoneySmart website has some great information and calculator tools • And, of course, the font of all superannuation knowledge is the ATO.

So, we have covered quite a lot of information today, but we have really only just scratched the surface. I trust that in looking at “What is Super? What do I need to know? And What do I need to do?” has inspired you to find out more about your super and to take an active interest in what is a very important part of your financial future.

Thanks for watching our video ’Managing your super’. I trust you found the information useful and relevant and I encourage you to check out the other videos and resources on the Davidson Institute website to help build your financial confidence.