Superannuation might sound dull and impenetrable – and unnecessary and irrelevant if you are under 40 – but let me tell you, there are lots of reasons to love it.
‘‘Exceptional value,’’ is how Scott Farmer of Bravium Financial Planning describes it. In savings terms, ‘‘nothing else in Australia comes close’’, he says.
Super is a long-term, tax-effective savings arrangement which provides income for retirement. Australia’s super system is a key element in the government’s long-term plan to reduce retirees’ reliance on the age pension – which is why politicians are prepared to offer generous tax breaks on super savings.
Each month, employers pay 9.5 per cent of our salaries into our super fund, which can be a large, professionally managed fund or a small fund that individuals manage themselves. The latter is known as a self-managed super fund.
Self-employed people can inject money into a super fund at any time during the financial year and claim a tax deduction.
The 9.5 per cent that employers must contribute to super on our behalf is known as the super guarantee and is taxed at 15 per cent if your income is under $300,000, rather than the marginal rate of tax that we would otherwise pay. This is where super starts to get really attractive.
That 15 per cent is rather marvelous when you consider that workers earning between $37,000 and $80,000 pay 34.5 per cent in tax, including the Medicare levy, and anyone earning between $80,000 and $180,000 is paying 39 per cent, including the levy.
While our money is in a super fund, any earnings generated are similarly taxed at 15 per cent – while earnings that we generate by going to work every day (i.e. our weekly or fortnightly pay cheques) are taxed at the generally much higher marginal rate. Assuming certain criteria are met, when we retire and start to withdraw money from super, it will be tax-free under the current rules.
Furthermore, our super pots will grow over time. Not only do we earn money on what we have saved into super, but we also earn money on the returns we make – so gains are turbocharged.
No wonder a financial adviser I know said that when she sat down to explain super to a group of women a few months ago they couldn’t believe what they were hearing.
Mind, there are a couple of caveats here. Any extra money you put into super can’t be taken out until you retire and start to withdraw your super savings – so you need to be sure you don’t need that money for a long time. Governments also have a nasty habit of changing the rules fairly frequently, so it can all become a bit confusing. That said, most of super’s main attractions are unlikely to be placed in the bin any time soon.
‘Ten per cent seems reasonable’
Sonja Connor is only 25 but she puts 10 per cent of her wages from hairdressing into her superannuation fund.
The contribution is part of the equally impressive 50 per cent of her income she saves each fortnight.
‘‘Ten per cent into super seems reasonable. At my age I’ve got no responsibilities and I can live on a lower budget,’’ says Connor, who has been financially independent since she was 16.
While I don’t have a mortgage I can still live on the money I lived on as an apprentice.
But she lives very well, choosing to spend on experiences — including a recent three-week trip to Europe staying in five-star accommodation.
‘‘I see no value in purchasing ‘things’; you throw out in a year what you buy today,’’ she says. ‘‘Nothing increases in value, so there’s no point.’’
Her worldly goods amount to 23 kilograms – the same weight as the suitcase she arrived in Australia with two years ago. The earthquake in her home town of Christchurch was a turning point.
‘‘I realised you only get one life and you never know what’s going to happen so you might as well make the most of it. I wanted bigger and better. I wanted to do what makes me happy.’’
She chose Melbourne for its creative culture and the Oscar Oscar Salon in Chadstone for its working culture. There she quickly progressed to second-in-charge.
Advice given by the wealthy father of a childhood friend has long resonated: “the only good debt is for education and a home to live in”. Connor has no debt and, indeed, no credit cards, but plenty of determination and an approach to her retirement savings that is to be envied.
Case study by Natasha Hughes