What is superannuation? If this is a question that’s been on your mind, and you want to better understand the significance of superannuation, you’re in the right place. For Australians, superannuation plays a vital role within any good financial plan, as its purpose built for the accumulation of retirement savings.
In this blog, we will explore what superannuation is and what makes it so important. Exploring the benefits of superannuation from a financial planning point of view.
Understanding Superannuation:
So, what is superannuation?
Superannuation is a government-mandated retirement savings system. It’s designed to ensure Australians have sufficient assets to fund their retirement and support themselves after they are no longer working to generate income. Superannuation contributions are typically made on behalf of an employee by their employer and there are employer minimums set by the government on what your employer is obliged to pay you. On top of this, there is also an option for individuals to make voluntary contributions, both concessional and non-concessional.
Types of Superannuation Contributions:
The most common type of superannuation contribution is a concessional contribution. Concessional contributions are funded from your pre-tax income and lower your tax liability, while also increasing your retirement savings. The maximum amount you can contribute each year is $27,500 p.a. and this includes what your employer contributes on your behalf. Mandated employer contributions are known as super guaranteed contributions or SGC and in 2024 this is 11% of your salary. Employers are required to pay 11% SGC up to a maximum salary of $249,080.
Depending on what you earn, there may be a gap between what your employer pays and the maximum contribution limit, and this can be an effective strategy to consider, to help reduce your taxable income and improve your retirement savings. If you earn less than $250,000, concessional contributions are taxed at 15% going into your super fund. If you earn greater than $250,000, tax can be up to 30%.
The other type of superannuation contribution you can make is non concessional. This is an after-tax contribution, made from your savings and the current limit is $110,000 p.a. however individuals can also bring forward up to three years of contribution or $330,000 in a single year. Age limits and other rules exist around who can make these contributions, so it is important you are aware of these and receiving appropriate financial planning advice may be prudent.
By making voluntary non-concessional contributions, you may also be eligible to take advantage of the government incentives like co-contribution or spouse contribution, providing an additional incentive to bolster retirement savings.
The Benefits of Superannuation:
Taking the time to understand the benefits associated with superannuation will benefit your financial plan. First and foremost, superannuation is highly tax advantageous. As we have already covered, contributions receive favourable tax treatment and usually make it an effective way to save for retirement, as well as minimise tax implications.
For your investments inside super, earnings are taxed concessionally at 10% – 15% while you are in accumulation. Then, when you are over 60, retired and convert your super to a pension, it is possible to pay 0% on earnings and 0% on withdrawals also. This is literally a legal tax haven. Balance limits apply though, which can make financial planning important to maximise the financial positions of HNW families. This tax advantage provides individuals with the opportunity to maximise their retirement savings over time, on a long-term basis.
Superannuation is also purpose built to pay an income stream and so makes it easier for you to create a regular income stream, to replace your employment income when you retire.
Superannuation and Compound Interest:
One of the most compelling reasons to prioritise superannuation is the power of compound interest. By starting early and consistently contributing to your superannuation fund, you can harness the potential of compounding. Compound interest refers to earning interest on both the initial investment and the accumulated interest. Over time, this compounding effect can significantly accelerate the growth of your superannuation balance, helping you achieve a comfortable retirement lifestyle.
The Role of Financial Planning:
Financial planning plays a crucial role in optimising your superannuation strategy. Professional financial planners can guide you through the intricacies of superannuation and help you make informed decisions aligned with your retirement goals. They take into account factors such as your desired retirement age, risk tolerance, and expected lifestyle to create a personalised financial plan that maximises your superannuation benefits. They will consider age pension strategies that may be applicable to help slow the draw down on your super. And they will consider alternative investment strategies, that may be suitable to increase the longevity of your funds.
Most important a financial planner will help you manage change proactively over time, to manage risk and make the most of opportunities, while helping you to remain objective about your financial decision making. Regular reviews and adjustments ensure that your strategy remains on track.
Embracing Superannuation for a Secure Future:
Understanding what superannuation is and its significance will help you secure your financial future. Superannuation serves as a powerful tool in retirement planning, offering tax advantages and the potential for compound growth. By embracing financial planning and continuously educating yourself, you can optimise your superannuation strategy to achieve your retirement goals. Take control of your financial future today and unlock the benefits of superannuation for a secure tomorrow.
Yield Financial Planning – Your Retirement Experts:
Yield Financial Planning are retirement experts who specialise in helping clients achieve their retirement goals through effective superannuation planning. Our team understand the intricacies of the Australian superannuation system and can provide tailored advice to maximise your retirement savings. Here at Yield, we adopt a holistic approach to retirement planning, considering your entire financial situation, including investments, debt management, and estate planning, to create a comprehensive retirement plan that suits your needs.
Contact the Yield team today, to learn more about how you could optimise your superannuation and start your journey to secure your ideal retirement lifestyle.