Superannuation how does it work australia




















Retail funds are overseen by financial institutions but are open to all. Public sector funds are usually open to government employees of the Commonwealth, state, or territory. Corporate funds are typically only open to those who work for a specific company. And, finally, there are self-managed super funds that are managed by the individual. Keep in mind that if you do not make the choice yourself, your employer will make the decision for you.

However, you can change at any time by providing your employer with the details of the super fund that you prefer. Allocated pensions are basically a regular stream of retirement income that is paid to you by your super fund. It is a way for retired individuals to receive wages again, but through the super account, not an employer. It is considered a private account-based pension and it also works in conjunction with any Government age pension that you receive. Downsizing can also impact on pension entitlements.

Beyond the obvious benefit of receiving a regular income, allocated pensions also allow the remaining balance of your super to continue to grow. As with the options available during your work years, super funds allow you to make the choice about how your money is invested. The amount of tax that you are required to pay on your super contributions depends on a number of factors, including how the contributions are made and how much is contributed each year.

No tax is paid on after-tax, or non-concessional, contributions, which include contributions you make from your after-tax income, contributions made by your spouse to your super fund, and other personal contributions that are not used as an income tax deduction.

There are limits on the amount of before-tax and after-tax contributions you make each year, and these may vary depending on the financial year and your age. If you contribute too much to your super, you may have to pay extra tax.

If you exceed the concessional contributions cap, the excess is included in your income tax return and taxed at your marginal tax rate. It is possible to withdraw some of your excess contributions in order to pay the extra tax. The tax on super benefits depends on your age, the source of the benefit and how the benefit is paid. Contributions that you made with your after-tax income do not incur any taxes when they are withdrawn from your super account, unless you have previously claimed a tax deduction for them.

Conversely, contributions that are using before-tax income are taxable when withdrawn. In most cases, employees can choose their own super fund. For more information on how to compare and choose a fund or start your own self-managed super fund SMSF , have a look at these SuperGuide sections. When you choose a fund you also get to choose how your super is invested. Your money will be invested in a MySuper account with low fees and simple features.

The compulsory nature of these employer-funded payments takes the pain out of saving for many Australians, but it can also encourage a sense of complacency. Super is often out of sight, out of mind, especially for younger workers who still have up to 40 years until retirement.

In fact, some low-income workers stand to be better off in retirement due to a combination of the Age Pension and their super entitlements. Of course, comfortable means different things to different people, so everyone needs to set their own retirement income target and work out how much super they will need to fund it. The government tacitly acknowledges this retirement savings shortfall with tax concessions for voluntary contributions, but its generosity has limits.

There are two contribution caps, based on whether you make contributions from before-tax or after-tax income. Concessional contributions are amounts paid into your super fund on a pre-tax basis. This includes employer contributions, salary sacrifice and any voluntary personal contributions for which you claim a tax deduction.

If you split your pre-tax contributions with your spouse , they are still counted towards your concessional cap. Under the new carry-forward rule , from 1 July you can carry forward unused concessional contributions for up to five years. This provides an opportunity for pre-retirees, or anyone who has taken time out of the workforce, to play catch-up and make additional super contributions at concessional rates.

The first year the carry-forward rule could be used was the —20 financial year. Important to know : If you go over your concessional cap including any carried-forward contributions , even inadvertently, the excess amount will be taxed at your marginal rate. Also be aware that contributions are counted towards your cap when they land in your fund, not when they are paid, which could be a different financial year.

Learn more in SuperGuide article What to do if you exceed your super contributions caps. This includes after-tax contributions made by you, your employer or your spouse.

Need to know: In the May Budget, the government announced a proposal to scrap the work test for people aged 67 to 74 who wish to make personal non-concessional contributions or salary sacrifice contributions. This change is not yet law but is expected to apply from 1 July If you wish to make a personal contribution for which you claim a tax deduction you will still be required to meet the work test.

However, from 1 July there is a new exemption from the work test for voluntary contributions in the first income year after retirement to allow retirees more time to prepare their finances. While some rules have been loosened, others have been tightened. From 1 July you cannot make any non-concessional contributions if your total super balance is above a certain limit as at 30 June the previous financial year.

Any excess concessional contributions will be added to your non-concessional contributions. This can have a snowball effect if you have already reached your non-concessional cap, resulting in additional tax to be paid on both your concessional and non-concessional contributions. In the Federal Budget, two special measures were introduced to help ease the housing affordability crisis. The First Home Saver Scheme FHSS allows you to make voluntary concessional or non-concessional contributions to your super to save towards buying your first home.

There is quite a bit of red tape around this measure so be sure to read the fine print. This change is expected to start from 1 July but is not yet law. This is not a concessional or non-concessional contribution and does not count towards your contribution caps.

In addition, it can only be used once, you must have owned the property for at least ten years, it is not tax deductible and it will count towards your eligibility for the Age Pension.

Need to know: From 1 July the government proposes reducing the age at which you can make a downsizer contribution from 65 to This is not yet law. A super fund is best imagined as a structure that holds your savings in a range of investments until you retire.

You could hold the same portfolio of shares, property, bonds, cash and other investments inside a super fund or outside super in your own name or in some other structure such as a family trust.

These investments, whatever the ownership structure, earn income in the form of dividends, rent or interest and produce capital gains or losses when they are sold. The thing that sets super apart is its taxation status; despite constant government tinkering it is still the most tax-effective home for retirement savings.

That and the length of time your savings are left to grow in super generally produce a better return on your money in the long run than you would earn if you invested in comparable investments outside super. Capital gains on the sale of assets inside super are also taxed at concessional rates.

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