By Alana James
Artwork by Josh Evans
What are you going to do when you retire? It’s an odd question to pose to uni students, sure, but I bet most of you have considered how you’re going to spend that well-earned time. For me, retirement looks a lot like drinking red wine on a secluded beach while gazing at a sunset.
Unfortunately, superannuation (which is my best chance of getting to that secluded beach) is not really a sexy subject. According to the Government’s recent TV advertisement, most people only think super is exciting when it’s used to describe a hero. Fair call. Superheros may be exciting, but to be honest the main thing I remember about the ad was correctly guessing it was Dave O’Neill doing the voiceover.
Now, if you believe everything you read and everything you have heard from politicians recently, you may presume that not only do we miss out on the red wine by the beach, but also that the world is going to implode and the Government will steal all our money.
Don’t panic, the world is not going to implode and your money is fine.
Actually, the recent super reforms are kind of a good thing. You may even say they are sexy. So let’s break the topic down a little and separate fantasy from fact.
FANTASY: There are shades of Cyprus about the super reforms and the Government is on a raid.
No, Tony Abbott, there are not shades of Cyprus. Australia’s banks are not going to shut down for a couple of weeks, we don’t need an IMF bailout deal, and the Government is not going to set daily bank withdrawal limits. If anything, the miscommunication surrounding the reforms has created shades of grey…
See, I can make superannuation sexy, right?
FACT: The superannuation guarantee rate is going up
The amount of money that your employer has to put into super for you is going up from nine per cent to 12 per cent. It will go up gradually between now and 2019. This means just that little bit extra is being put away each year for your retirement.
FANTASY: It’s going to cost everyone heaps more to put money into super.
There’s been a lot of talk that super is now going to be hit with taxes at every possible chance. Nope.
When you work, some of your moolah is taken out in tax before it lands in your bank account. This is around the 19 to 32 per cent mark, depending on how much you earn. If you choose to ‘salary sacrifice’ or tell your employers to take some of your pay out and put it straight into your super fund, only 15 per cent gets taken out in tax.
The difference of course is that you can’t touch your super until you retire. It’s a great idea though. Top up your retirement savings now, less money gets taken out in tax and you end up with more at the end.
FACT: You can put more money straight into super and avoid penalties.
There is a limit of how much you can put into your super at the lower tax rate. This is called a super contribution cap. Currently the contributions cap is $25,000 a year. This figure is ‘concessional’ which means before tax. The Government is increasing the concessional contributions cap to $35,000. This is happening in stages from now until 2018.
You also used to be automatically taxed quite a lot if you went over this amount. It’s easy to do if you have the money – many people don’t realise the maximum amount also takes into account the money your employer puts into your super account. These reforms mean there’s not an automatic charge; now you have an opportunity to withdraw the money that went over the threshold.
FANTASY: The Government is making it harder for me to save money in super
That’s just not what these reforms are about, quite the opposite. Unless you are swimming in cash, you won’t pay anything extra, and if you fall into the low income threshold you can actually get more money from the Government. This is because people who earn under $37,000 a year will receive a tax payment of up to $500 a year put into their super fund.It will be 15 per cent of your concessional (before tax) contributions.
So, if you are not salary sacrificing, it will be 15 per cent of what your employer puts into your super account. Win.
FACT: Around 1.2 per cent of people will get less money back in tax deductions.
So before everyone panics about tax concessions cut, it’s not happening to you. Unless you earn more than $300,000 a year, you don’t lose any money.
What does it mean for the 128,000 people that the Government estimates earn over $300,000 a year? Well, when you put money into your super funds, it can be counted as a tax deduction. This gives you an incentive to put some money away for retirement because you can then claim it on your tax. For these wealthy people, instead of being able to claim 30 per cent back as a tax deduction, they can now only claim 15 per cent back.
FANTASY: We are all going to get taxed ridiculous amounts once we retire.
In 2014- 2015 it’s predicted there will be just over four million retirees. With the new reforms, the Government estimates only 0.4 per cent of these retirees will be paying tax on their earnings.
FACT: According to Government estimates, less than half a per cent of retirees will pay tax (and only on earnings over $100,000)
Currently anything you earn once you’re retired is tax free. From July 1 2014 if you are retired and earn more than $100,000 a year, anything over that amount will be taxed at 15 per cent. This is because the Government is capping the tax exemption on assets supporting income streams.
Yeah, that sentence sounded like gobbledegook to me too.
Basically, even though you may be retired, your assets can earn you money. That’s right. Those assets of yours can be real money makers.
Is superannuation sexy yet?
Assets such as a business or house can earn you money and if you are already loaded this is just shaving a tiny bit off your excess earnings. So for the average person, anything you earn once retired is completely tax free.
It’s also good to note that this applies to ‘defined benefit funds’ as well, which are the types of funds that most federal MPs have.
FANTASY: Super is sexy
Okay, I’ll admit it. Superannuation is not much fun and it’s not sexy.
FACT: Super is SUPER IMPORTANT.
As bat-shit boring as it is, you should at the very least know which fund your lil nest egg is in. Check up on it, watch it grow – that’s your red wine and beach money!