Why is superannuation Important?
To understand this, we need to know what superannuation is.
Put simply, superannuation in Australia is a vehicle that allows us to save for retirement in a tax effective manner.
Contributions are made into your superannuation account (or accounts). These contributions are invested into assets that you are comfortable with and then your balance is drawn down upon once you cease work or are nearing retirement.
So, why is it important that we have such a structure in place? Who does it benefit? And what’s the catch?
The Importance of Superannuation
Above all, superannuation is important because it creates an incentive for individuals to accumulate wealth that is intended to support them, or at least assist in supporting them, throughout retirement.
What are the incentives of superannuation?
There are a number of incentives relating to superannuation, including:
- Ability to reduce personal income tax by making pre tax contributions to super often called salary sacrificing to superannuation
- Ensure all earnings received from assets are taxed at a maximum of 15% (compared to up to 45% plus levies in your individual name)
- A means of forced savings for your eventual retirement.
- A place to house and invest your compulsory employer contributions.
- Ability to draw tax free income in retirement.
Why has the Government created the superannuation vehicle?
Well let’s face it, as a population we are poor savers. Usually, saving for retirement isn’t on the top of our priority list. In fact, most people don’t think about how they will fund their retirement until about ten years out.
Thankfully there are some great strategies that can be used to ramp up retirement savings for those who have left things too late.
So, in order to get us saving, the Government has provided a number of incentives and support for us to put money aside. If it weren’t for these incentives, it is highly likely that a significantly higher proportion of the country would find themselves fully supported by the Government Age Pension. This would put a massive strain on the Government Budget (more-so than it already is). The rates for the Age Pension are already low and I can assure you they would be much lower if we didn’t have superannuation savings.
This is why superannuation is important. With more and more people reaching the average retirement age, it essential that we stop relying on social security benefits and begin self-funding our glory years instead.
What’s the catch of investing in superannuation?
Whilst there are many tax benefits associated with investing in superannuation, there are also some things you need to be aware of. For example, contributions made to superannuation can only be accessed once a condition of release has been met. You are also limited to the types of assets that you can invest in – depending on superannuation legislation and the approved investments of your Fund.
If you have a Self Managed Superannuation Fund (SMSF), you also need to ensure that all investments abide by the Investment strategy.