Discussions surrounding the need for Australians to set themselves up for a comfortable retirement usually includes a comprehensive savings plan, building an investment portfolio and plenty of superannuation.
There’s no doubting that superannuation is complex, with many of us left confused when interpreting our superannuation annual reports. Here we define some common superannuation terms to help you gain further understanding.
- Account-based pension
- Absolute return fund
- Concessional contributions
- First Home Super Saver Scheme (FHSS)
- Transfer balance cap (TBC)
- Salary sacrifice
- Self-managed super fund (SMSF)
- Growth phase
- Superannuation Guarantee (SG)
- Management expense ratio (MER %)
- Preservation age
An account-based pension, also known as an allocated pension, is a regular income stream purchased with superannuation money.
Once you retire or satisfy a condition of release, you can use your superannuation to start an income stream of monthly, quarterly, half-yearly or annual payments (subject to minimum drawdown rates set by the Government). You can also withdraw a lump sum.
Payments cease when the account balance is exhausted. Visit the MoneySmart website for more information.
Absolute return fund
An absolute return fund aims to consistently deliver positive returns in both rising and falling markets. They can add diversification benefits when added to a traditional investment portfolio. Although, there are always risks involved in any type of investment and there’s always a chance that an absolute return fund will at times, result in a negative return.
The meaning of a benchmark can change for its given context. In terms of a superannuation fund, a benchmark usually represents the minimum performance objective for the investment portfolio. For instance, a fund might use the S&P/ASX 200 Accumulation Index to benchmark its performance.
Concessional superannuation contributions are made using before-tax income and are sometimes referred to as deductible contributions. Your Superannuation Guarantee (SG) and additional employer contributions such as salary sacrificed contributions are types of concessional contributions.
First Home Super Saver Scheme (FHSS)
Introduced by the Australian Government in the 2017-18 Federal Budget, the FHSS allows you to save money for your first home within your Super Fund. This helps first home buyers save faster by benefiting from the concessional tax treatment of superannuation.
This is a term commonly used to describe someone who is accumulating their wealth with a goal to build for their future. In most cases, a nester is also investing in ways outside of their super to avoid fees and experience long-term growth.
Transfer balance cap (TBC)
This is the limit of the total amount of your superannuation that can be transferred into the retirement phase.
This transfer balance cap starts at $1.6 million and is indexed periodically in $100,000 increments. Your indexation entitlement will depend on the amount of your available ‘cap’ space. While you have remaining cap space, multiple transfers are allowed throughout the retirement phase.
Sometimes called salary packaging or total remuneration packaging, salary sacrifice refers to using your pre-tax salary to buy goods or services that you would normally buy with your after-tax pay.
This is an arrangement between employee and employer, and there are three categories of benefits that salary sacrificing can be used for, including fringe benefits, exempt benefits and superannuation.
Salary sacrificing into superannuation is a tax-efficient strategy because sacrificed contributions are taxed at a rate of 15 per cent if your gross income is under $250,000, or at 30 per cent if your gross income is greater than $250,000. This also allows sacrificed contributions to be utilised more effectively when accumulating savings in the FHSS scheme.
Self-managed super fund (SMSF)
An SMSF is a type of private super fund that you can manage yourself. SMSFs are regulated by the ATO and can have between one to four members, all of which must be trustees of the fund and involved in all decisions. We recently explored how you can buy an investment property through an SMSF.
A superannuation interest is in the growth phase before the member has reached any conditions for release.
The growth phase doesn’t stop if the member receives some of their superannuation through a payment that can occur for several reasons, such as financial hardship.
Superannuation Guarantee (SG)
The SG is the minimum an employer must pay in superannuation for each of their employees. An employee’s earnings will impact how much their SG is as it works on a percentage basis. Currently the SG is 9.5 per cent of an employee’s ordinary time earnings.
Management expense ratio (MER %)
There are a number of fees associated with all types of managed funds, including superannuation funds. The management expense ratio (MER) is the portion of your investments you must pay to the investment manager.
This is the age you must meet to be able to access your super. If you reach your preservation age and don’t permanently retire, you can still access part of your superannuation through a transition to retirement pension.
Your yield is the return of an investment as a percentage. Yield can be used for any type of investment including property, shares and superannuation.
Superannuation is a complex area with many aspects to consider when ensuring your strategy meets your needs. We recommend anyone seeking advice on superannuation to consult with a licensed professional.