Superannuation is a means of saving for your retirement with the added bonus of tax concessions. It is not an asset class like shares or property but rather a vehicle offering tax breaks when you invest in these assets.
In times gone by, people could expect to live only a handful of years after they retired and their bank savings supplemented by the pension were probably sufficient to see them through. But with people now living 20 or 30 years in retirement, there is a greater need to ensure sufficient funds are available to last for the long haul. Statistics show that if you take a couple aged 65, one of them has a one-in-three chance of reaching 100. That's a lot of years to provide for.
According to government estimates, you need to save 12 per cent of your annual income for the 40 years of your working life to give yourself an income equal to 40 per cent of your pre-retirement salary. And most of us want at least 60 per cent. So if you earn $50,000 now, a starting point might be to think of a retirement income of about $30,000 a year.
Without tax breaks and compulsory contributions from employers, few would have enough retirement income to ensure an adequate lifestyle. While you usually don't spend as much in retirement – fewer clothes, no school fees, probably no mortgage – you still want money in order to enjoy all those extra hours you have on your hands. Going out for dinner, enjoying the theatre, joining clubs and travel may constitute your retirement lifestyle. But these things cost money!
There are more than 240,000 superannuation funds in Australia, however more than 230,000 of these are DIY funds with fewer than 5 members. Each fund's trustees are responsible for investing the money on your behalf. Some companies have their own super schemes some are part of industry schemes while others contribute to a scheme run by the major banks and life insurance offices. You can also put your money in retirement savings accounts (RSA) with the major finance houses, and they will offer the same tax incentives as a super fund. While RSAs guarantee the capital this does not mean RSAs are better than a super fund. They are just an alternative for the conservative investor.
DIY funds (SMSF)
An SMSF is basically a super fund with one to four members. These members must be trustees who are responsible for the running of the SMSF. You can choose to have your own self-managed fund where you decide what you want to invest in, however the process is complex and shouldn't be taken lightly. If you do it well, the rewards may be significant but you should be mindful of the costs. There may be cost benefits and it may be worthwhile establishing a DIY superannuation fund if you have about $200,000 to invest.
Call our office if you’d like to know more about superannuation or wish to discuss DIY fund further.
