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Investment for Beginners

Work Super 101 – Part 1

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work super 101If you have a full time job or part time job, then you will have superannuation.

Regardless of your views on super, it is compulsory for employers to pay a certain level of super for their employees.  It is currently 9.5% of your ordinary time earnings.  Generally speaking, it is paid on the amount you earn for your ordinary hours of work.

As an employee starting a new job, your employer will provide you with a number of forms to complete.  Amongst them will be:

  • a TFN Declaration form to help the employer calculate how much income tax to deduct from your gross pay and remit to the ATO on your behalf (you have to fill in Part A); and
  • a Super Choice Form which is your instruction to your employer as to which superannuation fund you would like your super to be paid into

Because of the excitement of the new job, filling in forms becomes a bit of a chore.  For most people, nothing is more boring than superannuation (apart from watching paint dry) so when it comes to choosing a super fund, the easiest choice is to tick whatever default option the employer offers.  Super is super right?  Who cares?

You should care!  If you choose the default super option offered by your employer, your money will generally go to a default option or a MySuper option in one of the following types of super fund:

  • Industry fund
  • Government fund
  • Corporate fund
  • Employer-sponsored fund

I am not saying that these funds are poor choices. What I am saying is that your apathy in not making a more informed decision is the poor choice.  It’s leaving your retirement savings in someone else’s hands and hoping for the best that is the poor choice.  By doing so, you are giving up the opportunity to have active control over your money.  I’m sure you wouldn’t do that with any other money you have.

Also, the rod you are making for your own back is, by repeatedly selecting the default employer option every time you change jobs, you end up with a trail of superannuation accounts behind you.

While many employees in private enterprise can choose where their super goes, there are some employee groups who can’t.  It would come as no surprise that the most notable exceptions to the freedom of superannuation choice are the employees of union driven workplaces and the employees of the government itself.

If you work in any level of government in Australia, you will only be allowed to contribute to the relevant government super fund.  Similarly, if you work is a unionised workplace, you are likely to find there is an award or workplace agreement which forces your employer to direct all or part of your super to a relevant industry fund.  Industry funds are those funds which are run for the benefit of their members and of course, their associated unions.

 

 

insurance in super

Do You Have Insurance in your Super Fund? Have a Closer Look!

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insurance in superIf you have retail super, industry super, corporate super or you are in a large public fund, then read on because this applies to you.

There are benefits in arranging your life insurance through super, and they are mostly related to lower cost and budget affordability:

  • The cost of the cover is often cheaper because super funds purchase insurance policies in bulk and some funds pass back the benefit of the tax deductions they receive for premiums as a discount
  • Insurance through your super can be tax-effective because premiums are paid from your super account, which is pre-tax income, not your after-tax salary or wage income
  • You can have a basic level of cover for you and your family, even if money is tight
  • It is easy to manage because premiums are automatically deducted from your super account
  • Some funds automatically accept you for cover without requiring a health check

 

However, the greatest misconception is that insurance cover acquired through your super fund is free, particularly if you receive it automatically when you join.  This is definitely not the case.  Insurance through your super fund stills cost money, whether you asked for it or not.

The major limitation of insurance in superannuation is that only (a) life insurance (b) ‘any occupation’ TPD and (c) basic salary continuance insurance are available.   This is because superannuation law governs what is and what is not allowed in super.

The policies that you CANNOT arrange through your super are:

  • Trauma insurance
  • ‘Own occupation’ TPD
  • Agreed value Income Protection with benefits to age 65, plus choice of ancillary benefits. Generally only indemnity style policies with a 2-year benefit period are available
  • Any policy on a ‘level premium’ Only ‘stepped premium’ is available in super

AND

There are several other issues that you also need to be aware of if you are arranging insurance through your superannuation.  These include:

  • Insurance arranged through your superannuation is not owned by you. It is owned by the trustee of your super fund on your behalf
  • The level of cover available through super is often limited. What you receive automatically (as opposed to what you arrange yourself) could be well short of what you need
  • There are some severe restrictions on when, how much, and for how long salary continuance payments can be made to you if you are temporarily disabled and unable to work
  • If you move to a different super fund or your employer’s super contributions stop, your cover will likely terminate. This is not a problem if you hold your insurance outside super.
  • If you have more than one super fund with money in them, you may be paying for insurance in each fund, which may be an unnecessary cost
  • If you do not make a Binding Death Benefit Nomination, or your super fund does not offer binding nominations (many don’t), the trustee of your fund will decide who gets your benefits when you die, and it could be a lengthy and frustrating process. None of this is a problem if your hold your insurance outside superannuation.
  • In some circumstances lump sum benefits can be taxable.

This last point is a biggie!  Here’s why:

  • If you are paid a permanent disability (TPD) payment under 60 years of age, the benefit could be taxable.
  • If you die and your life insurance is paid to someone who is not a defined ‘dependant’ for tax purposes (the most common example is adult children), there could be significant tax implications

Generally, lump sum insurance benefits (life, TPD & Trauma insurance) are tax-free if held outside super.

So here is a tip if you already have, or are considering insurance in your super fund:

  • Consider topping up your super to cover the cost of the insurance premiums so your retirement nest egg is preserved and continues to grow over time. Remember that stepped premiums will rise each year, so your ‘top up’ needs to be reviewed annually.  If the additional contributions are the ‘non-concessional’ type (i.e. after-tax money), you may be eligible for the Government Co-Contribution Payment if your income is in the appropriate range.

General advice warning

The article above is general advice only designed to educate and heighten awareness of superannuation issues. It should not be regarded as personal advice because it does not take into account your personal circumstances, financial situation or specific goals. For personal advice that is tailored to your needs, please call me or consult a licensed financial adviser.