Old Head on Young Shoulders - Charles Badenach

Superannuation is an attractive structure in which to build for your eventual retirement despite the goal posts constantly changing. Having decided to use superannuation as an investment structure, you can use any of the following types of superannuation funds.

An industry fund is a broad term that is used to describe a superannuation fund that is established with the primary purpose for providing for a particular type of worker. Approximately 30% of workers use an industry fund and, for more information, it is worthwhile looking at their website www.industrysuper.com. The main industry super funds are Australian Super, Host Plus, C Bus, and Care Super.

As a general rule, industry super funds are suitable for those investors who have a small superannuation balance or have no interest in how their monies are invested. If you have no contact with an industry fund, your money will be invested in accordance with what is known as the default investment option. This default option usually provides a balanced asset allocation, by giving an investor exposure to all of the asset classes.

A retail superannuation fund can be broadly described as a superannuation fund, whose aim is not only to provide an investment and insurance solution for investors, but also to make a profit for the owners of the fund. There are more than four-thousand retail funds in Australia, and these are generally run by the major banks, insurance companies and fund managers. The standard retail fund does not offer a choice of investment managers, but simply has one investment manager.

These structures were very popular in the 1990s but, as the superannuation industry has developed, these structures have lost their appeal. They generally have a very high fees and limited investment choice when compared to the alternatives.

For example, retail superannuation often charges entry fees which can be as high as 4% of the capital sum invested and ongoing fees of up to 3%. This means that in the first year an investor, in some cases, needs to generate a return of over 7% to get a positive return. The good news is that competitive forces have now substantially reduced these costs so entry fees are now the exception rather than the norm and the ongoing fees have fallen to around 2–2.5%.

In the 1990s, many advisers built substantial businesses on the back of retail funds, and there was one well known adviser who set up the majority of the workers in a remote mining town on a regular savings plan of $1,000 per month into superannuation. At one stage, he had three-hundred workers each paying in $1,000 per month to super, charged 4% as an upfront fee and a 1% ongoing fee. Let us consider these numbers for a moment:

• 300 workers x $1,000 per month = $300,000 being contributed each month into superannuation

The compounding nature of the fees, excluding any growth in these funds due to market movements, means that in year one, the fees will be approximately $147,000; year two, $294,000; year three, $441,000; and so on. From this, you can see that it would not take very long to build up a very successful business using this strategy. With the recent changes to how financial advisers are paid this model will be outlawed from the 1st July 2012 onwards which to be frank is a positive move for the consumers.

In summary, these structures should be avoided at all costs, as there are better places to put your superannuation funds.

A wrap account is essentially a structure that offers a transaction and portfolio administration umbrella. This structure provides access to a wide range of wholesale, institutional and direct investments, such as listed shares, from a single point of reporting. Within a wrap structure there is usually a cash account—which is the account through which all of the investment transactions are processed, income received, contributions and payments made, and is the account from which fees are deducted. As a consequence of this, many investors like the transparency of this structure.

The financial adviser usually receives a fee for this structure of between 0.5% and 1.5% for providing ongoing financial advice to you. This amount is usually deducted on a monthly basis from the cash account. These fees can be worked out by getting a copy of the cash account transactions. With the introduction of the FOFA legislation from the 1st July 2012 these arrangements will need to be reviewed every 2 years.

• Provides a wide range of investment options from managed funds to direct shares

• The fee structure is generally very competitive when compared with the alternatives

For investors who take an active interest in their superannuation, a wrap or master trust structure can be an attractive alternative to a self managed superannuation fund.

With the recent focus on fees and investment performance, many people have elected to set up their own self managed superannuation fund, commonly known as SMSFs. These are small private funds, which have between one and four members. The trustee of the fund is either a company, known as a corporate trustee, or all of the members of the fund. The main disadvantage of these funds is that they involve a high degree of personal involvement and the ultimate responsibility for the fund lies with the trustee of the fund. You may engage other professionals such as accountants and financial advisers, but you are responsible for ensuring the fund complies with the appropriate tax and superannuation regulations.

• Given the fixed nature of many of the costs in running a fund the costs can be cheaper where you have large amounts invested within this structure

• Your investment choices are generally unlimited, provided you comply with the legislative requirements and the investment strategy of the fund permits this. For example, clients have had samurai swords, art, wine, and coin collections as an investment in their SMSF

• If you have other family members in the fund, it is an effective vehicle to transfer intergenerational wealth

• The fund can own a commercial property from which you can run your business. This enables the business to pay rent directly to your superannuation fund

There are a number of restrictions that you should be aware of, which are intended to ensure that the sole purpose of the fund is to provide for a member's retirement. Some of the main restrictions include:

• An in-house asset test, which prevents members from using an SMSF asset for personal purposes. The current rules prohibit a SMSF from holding more than 5% of the market value of all assets, in what is named as in-house assets

• Investments must meet the sole purpose test. This means that any investment must be for the sole purpose of providing for your retirement

• Any transactions must be at an arm's length. For example, a transaction must meet a basic commercial test

The costs of establishing a SMSF are approximately $400-$1,500 depending on who you use. If you are interested in setting up and using a SMSF, it is worth reviewing the Australian Taxation Office website on this subject (www.ato.gov.au).

One issue that has become apparent in recent years is the different approach that the Federal Government has taken to SMSF's when compared with general public offer funds. This approach was illustrated after the collapse of the Albury based funds manager Trio Capital after it appointed a Virgin Islands listed company known as Astarra Strategic to manage a large part of the portfolio. Those behind Astara Strategic had a chequered history and the result of this ill fated relationship was that $118 million of investors funds disappeared.

However, in an unprecedented move in 2011, the Federal Government announced that it would compensate those investors that lost money in the Trio Capital debacle where they had invested through public offer superannuation funds. If you invested through a SMSF you were excluded from the compensation offer as they have direct control of their monies, operate under different rules, are not regulated by the Australian Prudential Regulation Authority, and those that use these structures are considered to have a higher level of expertise than a member of a public offer fund. The moral of the story is to be very careful if investing through a SMSF as you won't enjoy the same protection mechanisms as members of public offer funds.

In the right circumstances, these structures are worth considering. All you need is a good accountant and a good financial adviser.

Unfortunately, there is no single correct answer to this question, as every person's situation is different and what suits one person may not suit another person.

• someone who prefers a wider range of investment options (including direct shares)

• all of the points outlined for a wrap account or master fund investor, plus:

• someone with a desire to invest in something outside the ordinary, such as artwork or a commercial building

• Someone who is prepared to take full responsibility for the consequences of their investment decisions

It is worth reviewing your superannuation on a regular basis, to ensure that it remains the best place in which you can hold your superannuation monies at that time. When reviewing your superannuation fund the following should be considered:

Insurance can provide financial assistance when you die, become unable to work, or need money due to an illness or disability. If you are considering changing funds and want insurance, make sure the new fund provides adequate insurance cover for unexpected emergencies.

• Some funds may not offer insurance, or have limited insurance cover that is not suitable to you

• You may have to pass a medical examination or undergo a waiting period before your application will be accepted. It is important, therefore, to keep the insurance cover going in your previous fund until you have cover in the new fund, before you rollover your superannuation monies

• Some funds provide you with a minimum level of insurance cover. This level of cover can then be increased or decreased as desired

• Decide how much insurance you want and compare the costs. These can vary significantly between different superannuation funds. It is also worth considering how much this level of cover would cost outside of the superannuation structure

Investment options. Most funds give you the option of choosing where your superannuation monies will be invested. This allows you to establish an asset allocation and a level of investment risk that you are comfortable with. Other funds have a default option if you make no choice.

Fund services and what they offer you as a member. For example, some funds have help lines, websites or free access to a financial planner. It is important to decide which services are important to you and check whether they are offered at a reasonable price. If you are using a financial adviser, it is worth discussing how they will report to you and what services they will provide to you.

Be aware of the fees involved with your superannuation fund. When making a comparison, be careful as you need to compare funds with similar benefits and investment strategies. A fund may have higher fees but may offer greater benefits. The fewer benefits and extras offered by a superannuation fund, the cheaper the fund will be. At the end of the day, the higher the fee the greater the investment performance needs to be to offset the higher cost structure.

Investment performance. It is essentially impossible to pick the best performing investment every year. A more appropriate strategy is to establish an asset allocation you are comfortable with and find investments that are compatible with this.

When comparing performance between Super funds, it is important to take a long term view as any period under five years is meaningless. A short term comparison can be misleading. Remember, there is no guarantee that a fund that has performed well in the past will continue to do so. Many investors are guilty of what is commonly referred to as "rear vision mirror investing"; in other words, investing based on the past not for the future.

Also, make sure you understand how an investment option works in describing its performance; for example, is it after tax with all fees and costs taken into account?

In summary, choosing an appropriate superannuation structure for you can have a significant impact on how you will enjoy your retirement. Choose carefully.

Superannuation can be in one of two phases—the accumulation phase or the pension phase—with each one being very different. The accumulation phase is when you are contributing to superannuation and usually covers the period while you are working. Once retired, many people commence an income stream from their superannuation. This second phase is called the pension phase, which is where you receive an income stream from your superannuation account. Each phase is subject to very different tax treatment and has different rules.

There are two main types of superannuation funds; an accumulation fund and a defined benefit fund.

As explained previously, an accumulation fund is what most Australians now have as their super fund, and how much you have when you retire depends on how much you put in, how much your employer puts in and the investment returns you receive from your investments. In other words, with an accumulation fund you bear the risk of investment markets and the long term sustainability of your funds.

The other option, which is less common nowadays, is what is known as a defined benefit fund. This type of fund has a defined benefit when you retire irrespective of how investment markets have performed. Your defined benefit is calculated according to a mathematical formula, which is normally worked out as follows:

• Final average salary x years of service x your benefit multiple = final benefit

• Final average salary usually refers to your average final salary over the last three or five years of your employment

• Years of service refers to how many years you were employed with your employer

• Benefit multiple is the factor used to calculate the final benefit. This benefit multiple is influenced by how much you contribute and your length of membership. The more you contribute, the more your benefit multiple grows

With defined benefit schemes, the employer bears all the risk as they are effectively guaranteeing that you will have a set sum at some stage in the future. For conservative investors, these schemes are very attractive as they are not subject to the normal market fluctuations.

The problems associated with defined benefit schemes have been highlighted in the demise of many of the great American companies. Defined benefit schemes create a future liability for the business, which may or may not be able to be paid. As an example the American auto industry has continued, despite a declining market share to offer past and present employees fully paid health insurance, retiree medical coverage and pensions20. This is like a continuing liability, dragging the profits of each of these companies down by a greater amount each year. In many instances the companies are supporting more former workers than they have current workers. Take General Motors for example; the cost of providing health care added from $1,100 to $1,500 to the cost of each of the 4.65 million vehicles General Motors sold in 2005, according to various calculations. General Motors spent at least $5.6 billion on health care in 2006, more than it spent on advertising in 2005. Another well known statistic within the US car industry is that they spend more per car on health care than on steel.

20 'Ailing GM looks to scale back generous health benefits' by Julie Appleby and Sharran Silke Carty, USA Today 23rd June 2005. www.usatoday.com

For these reasons, defined benefit schemes have been gradually been phased out in Australia. Many of these are still operating but do not accept new members.

It is important to note that you can only contribute to superannuation when you are in the accumulation phase. In other words, if you are getting a regular income stream such as an account based pension from your superannuation you cannot add additional funds to your superannuation account.

Within the accumulation phase you can contribute to superannuation in one of two ways.

A non-concessional contribution is an after-tax contribution which you make to superannuation. For example, if you sell a motor vehicle and contribute these proceeds to superannuation this would be classified as a non-concessional contribution. The government is constantly changing the amounts which you can contribute to superannuation and, for the 2011-2012 financial year, you can contribute $150,000 per financial year or up to $450,000 over a three year period.

As a general rule, most people don't make non-concessional contributions to superannuation until they attain at least fifty-five years of age as, once it has been contributed, it is very difficult to get back out again until you reach what is known as preservation age21 and retire.

21 Preservation age refers to the age in which a person gains access to their accumulated superannuation benefits.

A concessional contribution is a before-tax contribution to superannuation, and the current rules limit the amount that can be contributed to $25,000 per annum if you are under fifty, or $50,000 per annum if you are over fifty, until the 30th June, 2012. From the 1st July 2012 those over 50 with less than $500,000 in superannuation will be eligible to contribute $50,000 per annum as a concessional contribution. This contribution cap has been frequently adjusted by the Federal Government in recent years, and expect further changes. The underlying ambition of the Federal Government appears to be to make superannuation simple.

When you make a concessional contribution to superannuation, it is taxed at 15% on the way into your fund. Any contributions in excess of the contributions cap are taxed at 46.50%.

• As an employed person, your concessional contributions consist of both your employer superannuation guarantee contributions22, 9% of your salary and any salary sacrifice contributions you voluntarily make from your gross salary. For further information on salary sacrificing, please refer to the chapter titled "Wealth Accumulation Strategies"

• As a self employed person (for example, a tradesperson working by themselves) you are able to make a deductible contribution to superannuation up to the concessional contribution cap. By making a deductible contribution, you are able to contribute money to superannuation where it is taxed at 15%, which is often lower than a self employed person's marginal tax rate. For example, if you earn between $37,000 and $80,000 in the 2011-2012 financial year, you will be taxed at 30% on your income. A contribution to superannuation will save you 15% on every dollar contributed. The more you earn, the higher the tax saving

22 Superannuation Guarantee Contributions is the amount which your employer is obliged to contribute on your behalf into superannuation.

If you exceed the contributions cap by putting more money than you are allowed, either through your employer contributions or your salary sacrifice contributions, under the statutory limits, the Tax Commissioner has discretion to reallocate excess contributions or waive the excess amount in part or full.

In the 2011 Federal budget, the government amended these draconian provisions by allowing those eligible to have the excess contribution taxed at their marginal tax rate. This law has been a massive tax grab for the Federal government and many people have suffered significant financial penalties as a result of a simple and inadvertent mistake. For example there was a new client who worked as a helicopter pilot and given the nature of his employment, it was virtually impossible for him to obtain death and TPD insurance. His employer established a work superannuation fund with this cover in it and agreed to pay the premiums. The client salary sacrificed the maximum amount to superannuation in accordance with the law. However, as his employer was paying additional monies into the superannuation fund for the insurance premiums this meant the client exceeded the contributions cap by $11,000. The client received a bill from the ATO for $3,400 as the excess contribution penalty ($11,000 x 31.5%). However, in this instance the client was unaware of it, his employer caused the issue.

Although this rule has been relaxed slightly, don't get too excited about this as you can only use the relief once and the excess contribution is limited to $10,000 (unindexed).

The alternative is to rely on the ATO discretion which will be rarely used, so do not get your hopes up if you make a mistake. In the ATO Practice Statement Law Administration 2008/1 (PSLA 2008/1) indicates the Commissioner will consider the following in using this discretion:

• Whether a contribution made in one financial year would be more appropriately allocated to a different financial year

• Whether it was reasonably foreseeable when the contribution was made that there would be excess contributions for the financial year

• Where the contribution is made for the person by someone else, the terms of any agreement or arrangement covering the amount and timing of the contribution

• The extent to which the person had control over the making of the contributions

The ATO Practice Statement Law Administration 2008/1 (PSLA 2008/1) highlights several examples of where discretion may be used:

• Where a Superannuation Guarantee Charge (SGC) is collected relating to quarters in an earlier financial year and the payment of the required amount inadvertently puts the person above the concessional contributions cap in the year of receipt

• A delay in the superannuation fund processing the contribution at the end of the financial year

• A delay in an employer remitting a salary sacrifice contribution at the end of the financial year

• A transfer of an overseas superannuation benefit, where it exceeds the relevant cap due to currency fluctuations

The ATO has indicated on their website (www.ato.gov.au) that it will not use the discretion, for example:

• Where an individual is claiming financial hardship due to the imposition of the excess contributions tax assessment

• Where an individual exceeds their non-concessional contributions cap and requests for the excessive contributions to be allocated to a previous financial year in which they did not exhaust their non-concessional cap

It can be seen that ignorance of the law and/or incorrect professional advice are not viewed, on their own, as adequate reasons for the discretion to be exercised. When contributing to superannuation, be very careful, as the consequences can be very harsh.

The government co-contribution is an incentive which encourages you to make a non-concessional contribution to superannuation and, in return, the government will make an additional contribution for you depending on your income and how much you contribute.

For the 2011-2012 financial year, if your total income is $31,920 or less, the maximum co–contribution is $1,000. This is based on $1 from the government for every $1 you contribute. The co–contribution is reduced by 3.333 cents for every dollar your total income less allowable business deductions exceeds $31,920. There is no co–contribution payable where your income is greater than $61,920. The income level thresholds have been frozen at the current levels until the 30th June 2013.

If you are eligible for the government co-contribution, you will receive the co-contribution payment once you have lodged your tax return. The payment is then made directly into your superannuation fund and you will usually receive a letter from the tax office advising that this has been paid.

In the event that your spouse earns less than $13,800, you are able to make a super contribution for them and claim a tax offset for this contribution. An 18% tax offset is available on contributions of up to $3,000 you make on behalf of your non working or low income earning spouse. A spouse in this instance includes a de facto partner.

The splitting of superannuation contributions allows people to split their superannuation contributions with their spouse. Super funds have an option that will allow super splitting to their members but in many cases they don't. The splitting allows 85% of the member's contributions to be paid into their spouse's super and 15% into their own fund. For example, if a member contributes $25,000 to their superannuation fund under the splitting rules 85% of this sum could be contributed to their husband's or wife's superannuation. This strategy used to be worthwhile when there were limits (referred to as "reasonable benefit limits") on how much each person could have within superannuation which was taxed concessionally.

As there are now no limits as to how much money you can accumulate within super, this strategy is not really used all that often.

The following three tests must be satisfied before you can make a contribution to a super fund:

• If you are under sixty-five years you can make a contribution without any restrictions

• Between sixty-five and seventy years—contributions may be accepted from any source provided that you have been employed for at least forty hours over a thirty day period during the financial year in which the contributions are made. This includes payments made as mandated employer superannuation guarantee payments, usually 9% of your salary

• Between seventy to seventy-five years—the same requirements as if you are between sixty-five and seventy, with the exception being that your employer is no longer required to pay mandated superannuation guarantee payments. It is important to note that contributions must be received within twenty-eight days of the end of the month in which you reach seventy-five years of age

As a general rule, your superannuation benefits are preserved (i.e. tied up) until what is known as a "condition of release" has been met. When you satisfy a condition of release, you can access your superannuation monies.

As a starting point, you generally cannot access your superannuation benefits until you attain preservation age and retire from the workforce. The preservation age depends on the date in which you were born.

Date of Birth

Before 1 July 1960
From 1st July 1960 to 30th June 1961
From 1st July 1961 to 30th June 1962
From 1st July 1962 to 30th June 1963
From 1st July 1963 to 30th June 1964
On or after the 1st July 1964

It is my view that these dates will be extended further by the Federal Government, so the younger you are, the older you will need to be to access your superannuation monies.

Apart from having retired and attained preservation age, you can access your superannuation money in any of the following circumstances:

• When you attain sixty-five years of age, you can still work full time and access your super

• A terminal medical condition where two medical practitioners, one being a specialist, certify that you have a condition that is likely to result in your death within twelve months

• Financial hardship which is classified as being in receipt of Centrelink benefits for twenty-six weeks consecutively and unable to meet reasonable and immediate family living expenses, or thirty-nine weeks cumulatively if over preservation age and not gainfully employed

From time to time, you are likely to read about a scheme that will enable you to access your superannuation earlier than the legislation rules. Unfortunately, the old adage—if it sounds too good to be true, it normally is—applies here. These advertisements usually target those experiencing financial difficulties and offer to release some super to help pay debts. Unless the legislative requirements outlined are met, accessing your superannuation is illegal. These early release schemes are characterised by high fees and dodgy investments. When you are caught, both you and the promoter face significant legal and financial penalties. In summary, do not be tempted. It could be a very expensive experience.

The following is an extract of a real life example from the Federal Government website www.fido.gov.au:

'For most of my adult life I'd worked at the meatworks. In June 2003, the operators of the meatworks announced that they were closing down and would be making all four-hundred of us redundant.

'I didn't know what we were going to do. We had the mortgage payments on the house to meet, and had just bought a new car. Sure I'd be getting a redundancy payout, but nowhere near enough to keep us going. And how was I going to find another job when there were another three-hundred and ninety-nine blokes just like me looking for work at the same time?

'Things were looking really grim. The bank had issued a notice that they were going to foreclose on the house and my wife and I were fighting non-stop. 'Then one day after a union meeting, I came out to the car park and found a flyer under my windscreen wiper saying that I could get access to my superannuation. I rang the number and they told me that for about $2,000 they could set up a self managed superannuation fund for me, and that I could use that money to pay off my mortgage and car and stuff.

'Within four weeks they had arranged a deposit of around $65,000 into some new account that they set up for me and I was able to use the funds to get the mortgage repayments up to date, pay off the car and fix up a few things around the house that needed doing.

'I ended up getting a job at a local butcher and things were looking OK for about six months.

'Then, one day, I received a notice of assessment from the Australian Tax Office telling me that I had breached the rules about the administration of superannuation funds and that I had to pay back taxes on the money I had accessed. What with one thing and another, I ended up owing the tax office almost as much money as I got in the first place. Now I have no super at all and a big tax headache.'

What happens when you can access your superannuation monies really depends on the type of fund that you have. There are two types of funds.

A defined benefit fund provides a lump sum or indexed income stream, which is calculated according to a mathematical formula when you retire. The amount of this lump sum depends on how long you have worked with your employer, your salary during that period of employment and the attractiveness of what is known as the benefit multiple.

• Firstly, those that provide you with a lump sum on retirement, whereupon you need to rollover, i.e. move that sum to an accumulation pension plan (see over the page). In these circumstances, once you receive the lump sum, you bear all of the risk as to whether that lump sum will be sufficient to meet your income needs for the rest of your life

• The second type of defined benefit fund is one which allows you to take your benefit either as an income stream or lump sum. The latter type of fund allows you to continue to be a member after you have retired and left the workforce

• You can take the benefit as a lump sum and invest this yourself. You can invest this inside superannuation or outside of superannuation depending on your preference

• You can take the whole benefit as an indexed pension. Under this option, the superannuation fund would pay you a set income for the rest of your life indexed annually (this sum generally works out to be between 6 and 8.5% of the capital value of your lump sum and the indexed pension payments are fully taxable)

• You can take a combination of indexed pension and lump sum in whatever portions you wish

If you are in a defined benefit scheme, the relative advantages of each option need to be weighed up not only in financial terms, but also in terms of your lifestyle requirements, life expectancy and your personal preferences for leaving assets to your beneficiaries.

• Pension payments occur regularly with little risk of interruption and are State or Federal Government guaranteed (or, in rare instances, these payments are guaranteed by a company)

• Pension payments will usually be reversionary to a surviving spouse (two thirds of the original pension)

As a general comment the pension is potentially more attractive than the alternative lump sum, in an investment sense, if you are a conservative investor.

• Have a lower than average life expectancy, or hope to leave part of your funds as a residual benefit for your beneficiaries

• Have a low level of "other" funds—once commenced, the pension generally cannot be commuted to a lump sum to meet unexpected expenditure requirements

• Would invest the lump sum in a portfolio that has a reasonable proportion of growth assets

The main taxation difference between the pension and an alternative income stream, such as an account based pension, is that the indexed pension is partially taxable whilst the account based pension is paid tax free. As such, the indexed pension is less efficient from a taxation perspective.

This is an area where it is strongly advisable to seek advice from a suitably qualified financial adviser.

This is a fund where the member's balance is determined by the total contributions into the fund, plus the earnings of the fund, less any costs associated with the fund, tax, administration fees, etc.

Most people access their superannuation when they attain preservation age and retire from the workforce. When this occurs, you basically have three options:

Each of these options has different advantages and disadvantages,and what is right for one person may not necessarily be right for the next person. Most people, at some stage in their retirement, commence an income stream with their superannuation monies.

The most common option is to draw a regular income stream from your superannuation monies. The more you draw as an income stream from your superannuation fund, the quicker the balance of the fund will deplete. The most common types of income streams are a transition to retirement pension and an account based pension.

Prior to the 1st July 2007, you were required to retire from the workforce before you could access an income stream from your superannuation fund. This changed with the introduction of what is known as the transition to retirement pensions. This is an income stream that is paid from your superannuation account whilst you are still working. You need to have reached preservation age and still working to commence this type of pension. The Federal Government established these pensions as a means to enable workers to transition to retirement over time. It is important to note that whilst you can draw an income, up to a maximum of 10% per annum of the fund balance from your super fund, you cannot withdraw any lump sums until you retire.

The original intention was that a worker would work part time, for example, three days a week and supplement this income with a part drawdown from their superannuation fund. However, transition to retirement pensions have generally been used by high income earners to contribute additional amounts into superannuation, usually up to the maximum available limit, and receive a part transition to retirement pension to make up the income shortfall. The saving occurs through salary sacrificing part of your salary to superannuation (subject to a 15% contribution tax) which is taxed at a lower rate than your salary. The transition to retirement pension is the generally not taxable.

• A pension fund, (often known as a non-commutable account based pension) from which you receive an income stream

The higher your salary and the more you contribute to superannuation, the greater the tax saving to you. The effectiveness of this strategy has been limited somewhat with the introduction of contribution caps limiting the amount which you can contribute to superannuation.

This is a regular income stream, which is paid from your superannuation account without the restrictions associated with a transition to retirement pension. You can only commence an account based pension if you have reached preservation age and retired or, alternatively, still working but over sixty-five years of age.

You are able to withdraw lump sum payments from an account based pension at any time and the tax consequences depend on your age. If you are over sixty, any withdrawals are tax free.

You are required to draw a minimum annual income based on your age and the amount invested. The older you are, the more you are required to draw as an income stream. The account based pension drawdown amounts that need to be taken are as follows:

In the midst of the Global Financial Crisis, the Federal Government halved the minimum pension amounts that you were required to draw down and this ceased on the 30th June, 2010.

If you die, a death benefit will be paid from the superannuation fund. The amount, which will be paid out, depends on the balance as at the date of death together with any death cover that you may have within the superannuation fund. Where the benefit gets paid depends on what you have advised the superannuation fund.

The death benefit is generally paid to either your estate or your dependants such as your spouse or children. You are generally able to complete what is known as a binding death benefit nomination form, which enables you to advise the super fund as to where you would like your superannuation benefit paid on your death. It is worthwhile reviewing this nomination form every couple of years, to ensure that it remains up to date. There have been many instances where a deceased person has failed to update their binding nomination. Unfortunately, this often means superannuation monies have been paid to a former spouse or long term de facto partner. This is often not the intention of the deceased.

• Binding nomination—if you complete a binding nomination form and it complies with all of the legal requirements, the trustee of the superannuation fund must pay your benefit to the beneficiaries you have nominated and in the specified allocations. For example, you may want 50% of your balance to go to your spouse and 25% each to your two children

• Non-binding nomination—this allows the trustee of the superannuation fund to decide which of your beneficiaries will receive your accumulated balance using your nomination as a general guide. In my view, there is no point completing a non-binding nomination form

If you do not complete a nomination form, the benefit is generally paid to your estate. However, it is important to note that this is at the discretion of the superannuation fund trustee which has the potential to cause issues. For example, imagine you lived in a shared house with members of the opposite sex and you died. When you died you were single with a superannuation balance of $35,000 and death cover of $500,000. However, after your death your flat mate moved some of their belongings into your bedroom and slept in your bed for a few nights. They then made a claim to the superannuation fund claiming you were a de facto couple at the time of your death. Barring any unforeseen circumstances, your flat mate could receive $535,000 from your superannuation fund.

Your annual superannuation statement normally advises you as to whom you have nominated in the event of your death to receive your accumulated balance. You can change this nomination at any time.

It is important to note that there may be tax payable on the benefit in the event of your death. Whether or not there is tax payable depends on who receives the benefit and what they are going to do with it. There are two main types of beneficiaries:

• Dependant—these includes a spouse, former spouse, a child under eighteen years, or any person who was financially dependent on the deceased, and a person who had an interdependency relationship with the deceased

A beneficiary who is a dependant, as a general rule, receives their benefit tax free whilst a non dependant may need to pay tax on any amounts received.

It is well known that most Australians are under insured and a cost effective option for many people is to have a level of cover through their superannuation fund. Many industry funds provide a compulsory minimum level of cover and members have the option of increasing this level of cover.

These have proved very popular with members from a cash flow perspective, as the premiums are paid from the superannuation balances and not from their take home pay.

In addition to this, insurance cover within superannuation is often cheaper. For example, let us assume that the insurance premium for $1 million death cover is $1,600 per annum both within superannuation and outside of superannuation.

23 For the purposes of the comparison we have assumed that you earn between $6,001 and $37,000 for the 2011-2012 financial year.

From the table above, you will note that if your marginal tax rate is greater than 15% you will be paying more for insurance outside of superannuation than within superannuation, if your premiums are identical.

• You may be able to attract a group rate for your premiums. These usually apply to corporate superannuation plans

• Your cover will continue indefinitely until you cancel the insurance in writing. Whilst if you have cover outside of superannuation and cash flow gets tight, it is an expense that is often disregarded without thinking of the potential consequences

• You can often get a minimum level of cover without having to undertake a medical assessment

From this, you will note that having insurance within your superannuation fund can be an attractive option for many people and it is worth considering further.

In my experience, there are various superannuation strategies that become relevant depending on a person's age and stage of life. There are a number of key strategies that may be advantageous for people in the following age groups:

For people in this age group, with generally larger debts and constrained cash flow, additional contributions to superannuation are not always the priority. There is also the risk that the rules will change significantly before you can actually access the monies.

• Ensure adequate life insurance is included within your superannuation fund. The rationale for this strategy is that the cost of cover can be met by superannuation contributions, or funds earnings, rather than after tax income

• Where possible, consolidate multiple accounts to avoid paying unnecessary fees

In this age group, there may be one principal bread winner and a partner or spouse on a lower income or part time wage.

• Aim to increase pre-tax contributions to around 15% of gross income (inclusive of superannuation guarantee)

• Investigate whether a spouse contribution would qualify for a tax rebate of up to $540.

• Investigate whether you would qualify for the government co-contribution of up to $1,500

In this age group, mortgage debts have often been significantly reduced, hence the main objective is to accumulate sufficient funds for retirement.

• Maximise pre-tax contributions through salary sacrifice (up to the relevant age based limit of $50,000). The rationale for this strategy is that contributions tax is only 15% whereas income tax of up to 46.5% applies to personal income, so a tax concession of up to 31.5% of each dollar invested is available

• Investigate the merits of commencing a Transition to Retirement Pension for you

In this age group, debts are typically repaid, and with retirement or semi retirement imminent, income will be needed from accumulated assets.

• Investigate whether larger personal contributions can be made to superannuation (ie a contribution of up to $450,000 per individual may be able to be made), in addition to any salary sacrifice or personal tax deductible contribution being made

• Consider whether a pension should be commenced using accumulated superannuation funds, resulting in fund earnings and capital gains being tax free

Superannuation continues to be one of the most favourably taxed vehicles for the investment of retirement funds. The range of solutions now available offer different levels of control, while still allowing the delegation of administration and investment management.

In the event that you have forgotten where your superannuation is, the easiest way to find it is to go to the Australian Taxation Office website (www.ato.gov.au). The ATO maintains a lost members register of people who have been reported by their superannuation fund as being lost. You may find yourself on this register if you have:

To find any lost superannuation, all you need to do is phone 132865 and provide your name, date of birth and tax file number. If you have lost superannuation, the ATO will provide you with the contact details of the fund for you to follow up. Once you have located your lost superannuation monies, you can then sign a form which will rollover the lost superannuation to your new fund. Alternatively, you can download a lost member superannuation form from the ATO website.

As a starting point, an employer is not obliged to pay 9% of your wages as a superannuation guarantee contribution if:

In the event that you believe your employer has failed to pay your superannuation guarantee contributions, I suggest you:

• Ask your employer where your superannuation contributions are being paid. When you start work, your employer will ask where you would like your super paid or advise you what their default fund is. If your employer does not advise you of this within three months of starting, take action

• Contact your superannuation fund and enquire when the last super payment was made by your employer and how much

• If you still do not have any luck, call the tax office on 131020 and they will pursue this matter directly with your employer

If an employer fails to pay their superannuation guarantee contributions, they are liable for some fairly significant penalties from the ATO and, in Australia, we are lucky that it is quite rare that payments are not made when they should be.

As a general rule you can choose where your superannuation is paid, except where contributions are being made:

In certain limited situations employees in defined benefit schemes are also not entitled to choose a fund.

If you can make a choice on where your superannuation is paid and you do not, your employer will have established a default fund where your contributions are paid.

There are a number of factors that you need to consider when assessing a superannuation fund and they have been outlined earlier in this chapter.

This website contains information on superannuation and retirement income streams for all Australians.