Superannuation for dummies, 2nd edition

Facing Four Facts about the FutureLiving longer — ageing in comfort Straining the Government Age Pension Staying healthy costs more Expecting a reasonable lifestyle Planning for Your Lon

Superannuation For Dummies ®

Table of Contents

Introduction

About This Book

How to Use This Book

Foolish Assumptions

How This Book Is Organised

Part I: What Is Super, Really?

Part II: Super — Your Ticket to Ride

Part III: Taking Control Is a Piece of Cake

Part IV: Hey, Don’t Forget Your Retirement!

Part V: The Part of Tens

Part VI: Appendixes

Icons Used in This Book

Where to Go from Here

Part I: What Is Super, Really?

Chapter 1: Relax, Super’s Here to Stay

Understanding the RIPper Plan behind Super

Investing for the Long Tomorrow

Introducing the Eight-Step Program to Super Success Confronting SUPERstitions

‘Super is too complex’

‘Super is taxed too much’

‘My super’s going to disappear in fees’

Opting For a Tax-free Retirement

Chapter 2: Looking into Your Future

Retiring Isn’t That Far Away

Facing Four Facts about the Future

Living longer — ageing in comfort

Straining the Government Age Pension

Staying healthy costs more

Expecting a reasonable lifestyle

Planning for Your Long-Term Lifestyle

Living the Life of Riley in Retirement

Dreaming the fairytale

Grasping the reality

Taking the ostrich option

Getting serious about it

Saving the Super Way

Safe as houses

Investing outside of super

Banking on term deposits

Chapter 3: Spotting a Super Fund in the Wild

Discovering Six Fund Types on Your Super Safari

Recognising Your Super Type from a Distance

Being close to home — your employer’s fund

Chasing safety in numbers — industry fund (not-for-profit)

Shuffling the pack — retail fund (for profit)

Becoming a public sector fund member

Doing-it-yourself — DIY super fund

Taking refuge — Retirement Savings Account (RSA)

Appreciating a Super Fund’s DNA

Putting a super fund under the microscope

Passing the ‘complying fund’ test

Tapping into admin, admin, admin

Introducing super’s other little helpers — fund managers and more

Comparing Accumulation with Defined Benefit

Carrying the risk and earning the reward

Protecting a rare species — defined benefit funds Chapter 4: Choosing a Super Fund

Do You Have Super Fund Choice?

Changing jobs, choosing a fund

Nothing to choose, for some

Identifying Your Super Choices

Handing over your super to the experts

Delving into DIY super

Trusting a Fund’s PDS

Profiling a Super Fund — Your Super Choice Toolkit Checking Out the Super Competition

Relying on rating companies

Seeking financial advice

Leaving for Greener Pastures

Protecting your insurance cover

Avoiding higher fees

Losing out on extra employer contributions

Completing the Standard Choice Form

Providing new fund details to your employer

Chapter 5: Nothing Beats Super Advice

Seeking Information Before Advice

Starting with your super fund

Asking your employer

Removing the Con from the Content

Costing your advice

Critiquing commission advice

Choosing a Licensed Adviser

Checking out that adviser

Using a financial planner

Checking if your fund provides advisers

Approaching Super’s White Knights

Wagging the watchdog tail

Liaising with industry types

Did you say independent, and free?

Getting Your Super Beef Sorted Out

Understanding the complaints process

Taking your complaint further

Part II: Super — Your Ticket to Ride

Chapter 6: Getting Super Fit — Your Start-Up Kit

Taking Your Super Physical

Exercising your rights when joining a fund

Filling in fancy forms the right way

Keeping your paperwork up to date

Getting Compulsory Super Training — Employer Contributions

Giving nine every time — SG contributions

Scoring SG four times a year

Identifying additional employer contributions

Keeping an eye on your employer

Signing Up for Your Advanced Super Workout — Voluntary Contributions

Making after-tax contributions

Contributing before-tax dollars

Contributing for your spouse rebate

Splitting contributions with your spouse

Chapter 7: Becoming Friends with Your Super Fund

Getting the Lowdown on Your Fund

Chatting to your payroll officer

Reading the info from your super fund

Checking out your fund’s Web site

Taking advantage of your fund’s helpline

Attending your fund’s seminars

Who’s Looking After Your Super Piggy Bank?

Do you know your trustees by name?

Identifying a quality trustee board

Managing your super money

Understanding Your Member Statement

Reading the headlines

Navigating your way around your statement

Keeping Your Super Safe

Identifying the cops and robbers

Losing your super doesn’t make cents

Finding your ‘lost’ super

Chapter 8: Exploring the World of Super Investing

Understanding the Basic Ingredients of Super Investing

Classifying your assets

Suffering a super identity crisis

Setting up your super future in four steps

Investment Choice — Is Your Fund Offering a Fixed Menu or Open Buffet?

Checking whether your fund serves an open buffet Researching the best dishes from the investment buffet Defaulting on your investment choice

Desperately Seeking Super Performance

Investing for the long tomorrow

Deciding on a performance benchmark

Relying on past performance

Seeking glowing reviews on your fund’s performance Chapter 9: Keeping Watch Over Those Fees

Finding Out the Facts about Fees

High fees reduce your benefit

Combining your super accounts

Protecting small account balances

Appreciating Funds with Lower Fees

Running for profit, or not

Paying wholesale is cheaper

Understanding Your Super Fund’s Fees

Receiving fee information in plain English

Checking out your fees in your member statement

Unlocking the Secrets to Hidden Fees

Calculating Your Super Fees

Chapter 10: Cheaper Insurance and Other Benefits

Protecting Your Lifestyle and Your Life

Putting a value on your life and lifestyle

Counting the cost of living

Choosing Among Three Types of Insurance

Insuring your life

Insuring your body

Insuring your income

Relying on Your Employer’s Choice

Claiming Insurance Benefits

Paying super tax rates

Making an insurance complaint

Visiting Your One-Stop Super Shop

Taking advantage of super home loans

Accessing cheaper financial products

Part III: Taking Control Is a Piece of Cake

Chapter 11: Six Super Contribution Strategies When Before and After Matters

Choosing before- and after-tax contributions Before and after the age of 65

After turning 75

Adding After-Tax Contributions

Entering a tax-friendly environment

Bringing forward your limit

Talking tough on limits

Catering for special categories

Beefing Up Before-Tax Contributions

If the cap fits …

Claiming a tax deduction

Reducing CGT While Boosting Super

Taking Advantage of Salary Sacrifice

Getting your arrangement in place

Sacrificing your Superannuation Guarantee

Sacrificing the right salary amount

Weighing up the benefits of your sacrificial offering Joining the Co-Contribution Club

Checking the membership requirements

Receiving your bonus contribution

Splitting Super with Your Spouse

It takes two …

Splitting super straws

Chapter 12: Taxing Your Super While You’re Working

Entering the Super Tax Maze

Paying Less Tax than Your Marginal Rate

Reducing Income Tax the Super Way

Making non-concessional contributions

Sacrificing your salary

Claiming tax deductions for contributions

Taking It One Tax at a Time

Copping contributions tax

Handing-over-your-earnings taxes

Leaving-your-fund-before-you-turn-60 taxes

Super Survival — Changing Jobs or Taking Breaks

What about redundancy?

Taking employment termination payments

Transferring benefits from overseas

Chapter 13: Setting Up Your DIY Super Fund

Take Your Pick — the ATO or APRA

Considering whether DIY Super Is Right for You

Trying on DIY for size

Taking the Super C Quiz — Your DIY roadworthy

Costing the Running of Your Fund

Kick-starting your fund

Running your fund

Practising DIY Compliance Makes Perfect, Nearly

Monitoring the must-dos

Drafting your fund’s trust deed

Applying the sole purpose test

Drafting your investment strategy

Keeping financial records

Auditing your SMSF

Committing Long-Term to Your SMSF

Chapter 14: DIY Super and Investing

Committing to Your DIY Super Fund — a Life and Investment Decision Building Your DIY Super Fund Portfolio

Setting the framework — your DIY super fund’s investment strategy Identifying your goals — your DIY super fund’s investment objectives Getting into position — your DIY super fund’s asset allocation

Investing Directly versus Managed Funds

Hand-Picking Your DIY Super Fund’s Investments

Being direct on property

Investing in your office or factory

Investing in shares

Taking it easy on exotic investments

Transferring assets into your DIY super fund

Walking the Investment Tightrope

Keeping your investments at ‘arm’s length’

Meeting the sole purpose test — a must

Investing too close to home

Borrowing and lending is a no-no

Investing in Managed Funds

Chapter 15: Breaking Up Is Hard to Do

Can You Split Your Super?

Divorcing Your Super

Introducing your lawyer — a must

Declaring your separation

Carving up income streams

Doing the Super Splits

Discovering your spouse’s super secrets

Valuing your spouse’s super

Splitting more than straws

Excluding De Factos and Same-Sex Couples

Part IV: Hey, Don’t Forget Your Retirement!

Chapter 16: How Much Super Is Enough?

How Much Money Do You Really Need?

Choosing your lifestyle

Comparing a modest with a comfortable lifestyle What’s your savings target, then?

Living On More than $36,000 a Year

Choosing your response

Wanting more

Now, for the Good News!

Drawing a final line in the sand

Calculating your final super balance

Filling a Gap in Your Super Thinking

Boosting your super contributions

Delaying retirement

Lowering your expectations

Chapter 17: Taking a Lump Sum or Income Stream

Start Planning, Now!

Preparing for R day

Navigating the retirement road

Taking a Lump Sum Payment

Clearing your debts early

Paying the lump sum tax, if any

A Pension for Your Thoughts

Account-based pension or annuity — flexible income stream Lifetime pension or annuity — guaranteed

Term-certain pension or annuity — guaranteed

Transition-to-retirement pension or annuity — flexible income Chapter 18: Retiring Early (Before 60)?

Choosing the Right Time to Retire

Retiring too early

Working after retiring

Entering the Tax-Friendly World of Retirement

Tax and other complexities

Retiring doesn’t have to be taxing

Leaving a Lump in Your Throat

Mastering the Retirement Tax Tango

Deferring your lump sum tax

Paying zero tax on pension earnings

Making a mockery of marginal tax

Turning taxable into tax-free

Reclaiming your 15 per cent of tax flesh Finding the Right Gate to the Super Orchard

Waiting for your super to bear fruit

Understanding preserved benefits

Discovering your non-preserved benefits Chapter 19: Tax-Free Super for Over-60s

Turning 60 Isn’t Enough

Taking a Tax-Free Birthday Present

Understanding the DNA of a super benefit Hitting public servants with tax

Don’t Forget about Tax-Free Earnings

Dealing with Death Tax

Making a dash to the bank

Boosting your tax-free component

Raising the Roof on Tax-Free Thresholds

Paying less tax because you SATO

Claiming the LITO

And There’s More — Franking Credits Chapter 20: Your Super and the Age Pension

Getting the Best of Both Worlds

Claiming the Age Pension

Reaching Age Pension age

Receiving an indexed pension for life Enjoying retirement’s fringe benefits

Passing Your Age Pension Exams

Taking the assets test

Taking the income test

Taking Advantage of Super Income Streams

Earning a Tax-Free Pension Bonus

Chapter 21: Death Isn’t the End of Your Super

It Ain’t Over ’til the Fat Lady Sings — or Your Death Benefit Is Paid

Where does your super go, when you go?

Covering your debts beyond death

Complaining about a death benefit

Leaving Your Super to the Right People

Depending on you — your dependants

Having the last word — binding nominations

Where there’s a will there’s a way

Getting a Free Pass from the Tax Man

Taking a short course in tax

Receiving a lump sum death benefit

Receiving a superannuation income stream death benefit

Who Cares about Adam and Steve, and Super?

Part V: The Part of Tens

Chapter 22: Ten Snakes of Super — Room for Improvement

Suffering ‘Super’s Too Hard’ Syndrome

Creating Taxes for Every Occasion

Uncovering the Mystery of Commissions

Getting Your Money Before the Age of 55? — Forget It

Ignoring the ‘Aussie Battlers’

Leaving Women behind in Super Stakes

Continuing Saga for Same-Sex Couples

Double Dipping — Taking Two Bites of the Cherry

Outliving Your Super Investment

Copping a Death Tax

Chapter 23: Ten Ladders of Super — Good Things about Super

Telling a RIPper Tale

Saving Super in Your Sleep

Paying No Taxes, or Lower Taxes

Compounding Your Super Interest

Super Freebies from the Government

Sacrificing Salary for Super

Getting More for Your Super Buck

Diving into DIY Super — Head First

Barking Watchdogs and Roving Regulators

Leaving Tax-Free Benefits for Your Family

Part VI: Appendixes

Appendix A: Indexed Thresholds, Life Expectancy and Sample Member Statement

Appendix B: Important Organisations

Government-funded consumer organisations

Privately funded consumer organisations

Australian Prudential Regulation Authority (APRA)

Australian Securities and Investments Commission (ASIC)

Australian Taxation Office (ATO)

Centrelink

Department of Families, Community Services and Indigenous Affairs

(FaCSIA)

Superannuation Complaints Tribunal (SCT)

The Association of Superannuation Funds of Australia (ASFA)

Australian Institute of Superannuation Trustees (AIST)

CPA Australia and Institute of Chartered Accountants of Australia (ICAA) Financial Planning Association (FPA)

Investment and Financial Services Association Limited (IFSA)

Self-managed Super Fund Professionals’ Association of Australia (SPAA)

Appendix C: Glossary

Superannuation For Dummies

by Trish Power

Wiley Publishing Australia Pty Ltd

Superannuation For Dummies®

2nd edition published 2007 by Wiley Publishing Australia Pty Ltd 42 McDougall Street Milton,

Qld 4064 www.dummies.com

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Power, Trish

Superannuation for dummies 2nd ed

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About the Author

Trish Power is an author and journalist who lived a former life as a superannuation tech-head, andtoyed with the idea of becoming a nomad

She is the author of Superannuation For Dummies, Superannuation: Choosing a Fund For

Dummies and Dear Trish: Super — Tax-free Superannuation Dollars For You Trish is the

co-author of You Don’t Have to be Rich to Become Wealthy: The Baby Boomers Investment Bible and a contributor to Making Money: Alan Kohler’s Guide for the Independent Investor.

She is Superannuation Editor for investment newsletter Eureka Report, where she writes a weekly column called Dear Trish covering all aspects of superannuation, including investing She also writes the four-page DIY Super section for investment publication Investing Times Trish is a contributor to other financial publications including The Age, Superfunds magazine and

INTHEBLACK.

Trish describes much of her financial writing as educative journalism She is interviewed

regularly on radio and presents at educational seminars, typically speaking about investing,

superannuation, property, and women and investing

Trish has worked on member communication campaigns for some of the largest superannuationfunds in Australia, and spent several years educating and advising the community and industry onsuper while employed with the industry regulator She also held the role of Technical Manager forCPA Australia’s Superannuation Centre of Excellence before moving to New Zealand and writing

a novel

Trish has both a law degree and an economics/commerce degree from the University of

Melbourne, and holds a professional writing and editing qualification from RMIT University

She has travelled extensively throughout Asia, the Middle East, Africa and Europe Her all-timefavourite destinations are Venice, Iceland, Central Australia, Botswana and Petra in Jordan

Trish lives in Elwood, Victoria, with her partner

This book is dedicated to all of those in the community who work tirelessly to educate and

empower Australians about financial opportunity — giving Aussies access to plain-English

information that allows anyone to make their lives more secure in retirement and in day-to-daylife

This second edition is also dedicated to my late aunt, Mary Power, who was a great supporter of

my publications and who passed away during the writing of this edition

A Special Thanks to CPA Australia

A special thanks to CPA Australia, in particular Michael Davison, who kindly conducted thetechnical review of the final manuscript Michael has lived and breathed the superannuation

changes — he has a marvellous grasp of the big picture super issues and also how individual fundmembers are affected Thank you Michael for your counsel over the past few years

Author’s Acknowledgments

A lot of wonderful people helped make the second edition of Superannuation For Dummies a

reality My editor, Robi van Nooten, again generously gave of her experience and intellect andworked with me to create the best book possible

Thanks and kudos to Lesley Beaumont, Charlotte Duff and the rest of the Wiley team for

appreciating the importance of updating Superannuation For Dummies I also want to

acknowledge Michaela Anderson, Bradley Pragnell and the ASFA team for their involvement inreviewing the previous edition of this book

A big thank you to Alan Kohler for writing such a positive foreword and for supporting this book.Thanks Alan

My friend, Kate McKinna, who, as with the first edition, read many of the chapters and providedexcellent feedback Thank you Kate for taking the time

And many thanks to Angela Longo from Greenfields Financial Services Lawyers for reviewing thedeath and divorce chapters, despite her hectic workload And to Kevin Kelly, thanks for yoursupport

Again, thanks to my superannuation specialist brother Peter Power and his 3 Dimensions businesspartner Paul Lam for acting as a sounding board for my super scenarios, and for assisting me when

my computer misbehaved

When writing a book, sometimes the deadlines require understanding from the people you work

with Thanks to the team at Investing Times, in particular Ian Murdoch, Jamie Nemtsas and Susan Cameron Also the team at Eureka Report — Alan Kohler, James Kirby, Catherine Cardinet,

Jamie Harrison, James Frost (Frosty) and Rowan Wilde And you, too, Jodie

And thanks again to Janine Mace, editor of Superfunds magazine for originally recommending me for this book and her ongoing support, and to Jackie Blondell, editor of INTHEBLACK, for her

good humour about my unavailability due to my ongoing book commitments

A heartfelt thanks to my partner Siobhan and my sister Julianne for our long beachside walks andcafé catch-ups, and tolerance for my incessant ‘working on the book’ in bayside cafes, while theychatted together Thanks to my father for cutting out that job ad in the superannuation industry 20-odd years ago, and thanks Mum for keeping me chuckling throughout the writing of this book, andevery other book that I have written

And to my friend, Sharon Shelley, for encouraging me many years ago to move from tech-head towriter

Publisher’s Acknowledgments

We’re proud of this book; please send us your comments through our Dummies online registrationform located at www.dummies.com/register/

Some of the people who helped bring this book to market include the following:

Acquisitions, Editorial and Media Development

Project Editor: Robi van Nooten, On-Track Editorial Services

Acquisitions Editor: Charlotte Duff

Technical Reviewer: Michael Davison, CPA Australia

Editorial Manager: Gabrielle Packman

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The then Treasurer Paul Keating and the Labor Party did a great thing for Australia when they set

up Australia’s unique superannuation system in the late 1980s The result of that initiative is aballooning in national savings and greater financial independence for most people living here.These benefits are helped by the fact that both the share and the property markets have gone up for

16 years — virtually from the moment everyone was required to put money into super and,

therefore, to invest in shares and property

Currently, a trillion dollars ($1,000,000,000,000) is sitting in super in Australia, and, as a direct

result of Superannuation Guarantee (compulsory contributions made by employers on behalf of

their employees to superannuation), the Australian sharemarket increased from 1.5 per cent of theworld’s investment pool to 2.5 per cent ‘Little’ Australia, with its 20 million people, has thefourth biggest retirement savings pool in the world, and is truly punching above its weight in theglobal financial system

But Paul Keating left something out He forgot to make the system simple Previously, anyone whofound the whole concept of superannuation too hard just didn’t bother with it But as soon as the1990s began, Superannuation Guarantee was mandatory; every employee was in it whether theyliked it or not, and more especially whether they understood it or not

The complexity of superannuation means the entire working population is required to employ asuper fund and, therefore, to put themselves into the hands of an industry that is, like many

industries, a little mysterious

Many super funds such as the industry funds (which were set up by Paul Keating and the ACTU’sBill Kelty at the same time as Superannuation Guarantee) are ‘not for profit’ These types of fundscan make the choice of funds in the super system more complex As well, what to do with the

money when you retire is just as perplexing an issue For example, does anyone understand the

term account-based income stream?

The good news for us all is that a few people dedicate their professional lives to helping peopleunderstanding super — so you can take more control and don’t have to leave your decision making

to the mercy of sometimes unscrupulous financial advisers One independent expert is Trish

Power, superannuation editor of investment newsletter Eureka Report and one of the nation’s

foremost authors on the complexities of our unique system of saving for retirement In

Superannuation For Dummies, 2nd edition, Trish explains complex concepts in plain English,

which makes the topic of superannuation fun and rewarding to read about

The For Dummies presentation is a great platform for explaining super The Dummies Way is easy

for everyone to use, whether you start from a base of some knowledge or not If you know a bitabout the subject, you can skip the bits that are too basic and go straight to the real value that anexpert like Trish provides And if you’re new to taking advantage of using superannuation as a

personal financial planning tool, the basics are there too.

Australia’s superannuation system is evolving all the time In 2007, a set of new rules were

introduced to make super simpler and a more worthwhile investment These changes certainlyachieved the latter aim: You only have to look at the huge increase in super balances during June

2007 — including a lot of borrowed money — as people moved to take advantage of the

beneficial tax rules before 1 July 2007 when they came into force

But like all new sets of regulation, the changes probably add to the complexity of the system Theycertainly make understanding what’s going on more important, which is where reading this bookcomes in so that you don’t miss out on some of the tremendous investment and retirement lifestyleadvantages available from superannuation

Alan Kohler Publisher Eureka Report www.eurekareport.com.au

I f you’re just beginning your superannuation journey, or you’re seeking deeper answers to your

super questions, you’ve certainly landed on your feet by choosing Superannuation For Dummies,

2nd edition

Getting serious about super (and retirement planning) is the ‘must-do’ that seems to fall off manypeople’s to-do list You, however, are now one of the growing numbers of Australians who want

to find out what all the super fuss is about Reading this book can help you take super out of the

‘tasks for later’ basket

Start today! Your biggest enemy in getting your superannuation working for you is procrastination

About This Book

Superannuation For Dummies, 2nd edition, caters for super beginners and serves as a

comprehensive reference for the more super-savvy members of the community This second

edition is a more exciting version than the first edition, however, because I spread the great newsabout how nearly every Australian can enjoy a tax-free retirement simply by turning 60 and

retiring

The May 2006 announcement of tax-free super for over-60s, effective from July 2007, took

everyone by surprise — the superannuation industry, financial advisers and super fund members.The news took me by surprise, too

The morning before the Federal 2006 May Budget, I hopped on a plane to spend three weeks atone of my favourite destinations — Venice — to totally forget about work But, en route, the

Government announced the revolutionary changes promising tax-free super for over-60s, effectivefrom 1 July 1007 And so every second day of my Venice holiday I spent an hour or so in an

Internet café checking out what the industry and Government were saying about the radical superchanges Sad, don’t you think?

From 10 May 2006 until July 2007, when most of the super rules took effect, it was a crazy timefor the superannuation industry and fund members Superannuation fund members were grapplingwith new caps on super contributions, and processing the prospect of tax-free super income Theindustry was identifying the issues that fund members may face with the changes, including theintroduction of a new type of pension

This book is a plain-English ‘bible’ on superannuation that weaves together the latest myriadchanges to super with everything else you need to know about your super benefit I give you tools

to work out how much super is enough, strategies to accumulate lots of super, factors to consider

when choosing a super fund, and what to do with your tax-free money when you retire on or afterthe age of 60.

I’m very proud of Superannuation For Dummies, 2nd edition, and believe that every person has

the right to plain-English information about something as important as their future financial

security

How to Use This Book

In this book, you can find everything that makes superannuation tick in simple language Take yourtime and enjoy the read Who says you can’t enjoy superannuation?

Make the book work for you You can use this book as a handy reference guide or treat it as ahow-to manual on super For example, you may want to find out how much superannuation youhave now (see Chapter 7), or how to make extra super contributions (see Chapters 6 and 11)

You can open any page and easily find your way around the book I use cross-references to directyou to other chapters and sections that can give you more information on your area of interest

Foolish Assumptions

I wrote this book with several assumptions in mind I assume that you want a book that provides awarts-and-all look at super and that gives you the simple facts on the subject in an easy-to-readformat You also want to find out about the countless opportunities that you have to boost yoursuper benefit, and of course the steps you need to take to retire with a tax-free income

I also assume you don’t want to get bogged down with terminology but that you accept you mayneed to get on top of some super terms, which are clearly explained in this book

Australians, like super funds, come in all shapes and sizes and, so, I have the expectation that youfall into one or more of the following categories:

Employee You may be joining a super fund, already a member of a fund or considering

running your own fund This book gives you the full monty on super, stripping away therazzle-dazzle and mystery

Self-employed You don’t have an employer to contribute super for you This book gives

you information that makes super easy to organise, rather than a drag or left forgotten inthe ‘too hard’ basket

Not working If you’re under the age of 65 you don’t have to be working to be contributing

to super This book can show you ways to beef up your super benefit.

DIY super fund devotee Running your own fund is the ultimate form of super control.

This book takes you through what you need to know and do to run your own fund, andcleverly sets you a quiz to find out whether you’re a candidate for running a DIY superfund

Retiree (or prospective retiree) Retirement is why super exists If you’re close to

retirement or planning ahead for your retirement or perhaps already retired, this book canhelp (see Part IV) You can also continue contributing to super in retirement if you wish.Keep on reading to find out more

Employer You’re trying to run a business and look after your employees, and super may

be just another one of those ‘taxes’ that you have to pay This book can unlock the door onhow your employees see your super contribution, and show you ways that super can helpyou

HR specialist or payroll officer You’re often the first port of call when one of your

colleagues has a question about their super You may be fielding a lot of calls about supercontributions or even negotiating employment agreements Your colleagues may also thinkyou’re a super expert Why burst the bubble? This book can be your friend in your officebookcase

Accountant or adviser on super Do the eyes of your clients glaze over when you mention

super? This book explains all those tricky concepts in everyday language, most of thetime Hey, you might even discover something you didn’t know about super

Worker in the super industry You probably know a lot about a specialist area of super.

This book gives you information on all the other super areas that you don’t have time toget on top of

How This Book Is Organised

The book is organised in six parts that cover everything you need to know about your super

Part I: What Is Super, Really?

In this part, I explain why superannuation exists and why you can’t ignore the importance of superwhen saving for your retirement I take you through the different types of super funds and what youshould consider when choosing a super fund I also explore your options for seeking more

information about super, or obtaining financial advice

Part II: Super — Your Ticket to Ride

Making the most from your super account is really what this part is about I give you the nuts andbolts on one of the most important aspects of superannuation — super contributions I explain thekey decisions you need to make when you join a super fund and I give you heaps of tips on how toget on top of your super entitlements without necessarily spending any money I take you throughwhat you need to consider when choosing your super fund’s investment options, and tips on how towork out the fees that your fund charges and where you can get the best fee deal If you’re afterinsurance, this part also explains how you can get great insurance deals in your super fund

Part III: Taking Control Is a Piece of Cake

You have lots of opportunities to give your superannuation savings a helping hand In this part, Igive you the inside story on six popular super-boosting strategies involving super contributions Iexplain why you pay lower than normal tax rates on super, most of the time, and how your superand other payments are treated if you’re made redundant, or when you receive a termination

payment directly from your employer If you’re seeking even greater control over your super, Ishow you how to set up your own fund, what rules you must follow and ways to invest your DIYsuper moneys I also explain how the super rules apply to super benefits when a couple is

separating or divorcing

Part IV: Hey, Don’t Forget Your Retirement!

The only reason your super exists is to provide you with a better life after you finish working Inthis part, I explore how much money you need for a comfortable lifestyle in retirement, and

whether taking a lump sum or a pension is your best option I explain how easy it is to plan for atax-free retirement, and how tax can have a huge influence on any retirement decision you maymake, if you choose to retire before the age of 60 I also investigate how your super affects yoursocial security entitlements (if at all), and I take you through what happens to your super after youdie

Part V: The Part of Tens

Playing snakes and ladders takes on a whole new meaning in the world of superannuation In thispart, I give you a brief rundown on

Ten areas where super can lift its game (snakes)

Ten areas where super is a real winner (ladders)

Part VI: Appendixes

This part contains a collection of useful quick references for the following:

Appendix A A list of tax rates and thresholds that change every six months, every year or

periodically, including where you can go to get the latest rates I also give you the latestlife expectancy rates — you can find out how long you’re expected to live, on average.And, if you want to know what a member statement looks like, you can check out a samplethat comes from a real-life super fund

Appendix B Contact details of important organisations that protect your super or provide

excellent free (and not-so-free in some cases) information

Appendix C The best for last — a glossary of superannuation terms Don’t let terminology

put you off getting to know more about your super, and never underestimate the usefulness

of a glossary

Icons Used in This Book

Everything in this book is worthwhile reading, but some paragraphs jump out at you — an

important piece of information to remember or a handy tip to help you with your super

In the margins of the book, you can find the following icons marking certain paragraphs containingthat kind of special information Here’s what they mean:

This icon notes gems of information that can help you boost your super, get betterinformation or save your time (and sometimes money)

The Remember icon prompts you to store important information in your super memory.You may want to circle this information as a memory prompt

Beware! Watch your step! A warning icon flags financial pitfalls or serious legal issuesthat you need to be aware of when making super decisions

Interesting super information that puts a few more brain cells to work You can read andenjoy, or skip and continue on with the chapter You don’t have to read the technical stuff to

understand super but reading these paragraphs can provide you with a more complete picture

The Internet is a great mate for superannuation fund members I use this icon when Irefer to a Web site that can give more information on a subject, or has a handy tool that you canuse, or can help when you want the latest figures available

I devote two chapters (13 and 14) specifically to DIY super funds, but I use the DIY supericon in the rest of the book to highlight special rules or conditions that apply only to DIY superfunds That way, if you have a DIY super fund or if you’re considering it, you can read the rest ofthe book and easily find the special DIY super rules that usually apply in addition to the normalsuper rules

Where to Go from Here

Start with the section that interests you the most Find what you’re looking for in the Contents at aGlance, which is a list of all the chapters in the book, or head directly to the Table of Contents,which breaks down the structure of each chapter

If you’re just beginning your super journey, Chapter 1 is an excellent starting point Or you may beone of the many readers who want to head straight to Chapter 16 to find out how much super youneed for your retirement

If you want to know how you can get a tax-free income in retirement, head to Chapter 19 For arundown on investing, including tips on identifying ways to get the best long-term returns fromyour super fund, turn to Chapter 8

A must-read chapter is Chapter 5, where I take you through your options when seeking more

information about super, or obtaining financial advice I also explain the difference between

information and advice

If you want to immerse yourself in finding out about DIY super funds, go to Chapters 13 and 14

Part I What Is Super, Really?

In this part

Superannuation is just like visiting a new city — with a history, and with lots of interesting

attractions and confusing distractions Exploring can be exciting but it can also be overwhelming ifyou don’t know where you are Referring to a map is the quickest way to get your bearings beforeyou explore any new place Treat this part as your travel map to superannuation

This part helps you understand why superannuation exists, how it relates to your financial securityand why you can’t ignore the importance of superannuation in funding the retirement of

Australians I take you through the different types of superannuation funds and what you shouldconsider when choosing a super fund Even with the best travel maps you usually need to ask

directions at some stage I devote a chapter to explaining the options you have available to you forseeking more information about super, or obtaining financial advice All aboard!

Chapter 1 Relax, Super’s Here to Stay

In This Chapter

Introducing the Government’s grand retirement plan

Understanding that super’s just a long-term savings plan

Having a super say in eight simple steps

Debunking super myths

Planning for your tax-free super retirement starts today

I often hear people say, ‘I’m going to retire early … When I retire I want to travel … When I retire

I want to play golf …’ These plans sound fantastic — playing golf is on my list too However, Irarely hear Aussies say, ‘When I retire I plan to live on the Age Pension and rely on the charity of

my children for life’s little luxuries.’

If superannuation didn’t exist, we’d have to invent the concept Superannuation (‘super’ for short)

is Australia’s antidote to the highly contagious financial illness known as underfundus

retirementus — that is, not having enough money in retirement.

Fortunately, superannuation is relatively painless, and the super antidote is highly effective againstpoverty in retirement A regular injection of savings into your superannuation fund can financeyour older years while you’re busy getting on with your life now

For most Australians, super is the easiest and most tax-effective way to save for your retirement Ifyou’re an employee, your boss automatically contributes money to your super fund Over 30 years

of employment, you can have a super account containing hundreds of thousands of dollars,

depending on your income If you make your own contributions, your benefit can be even bigger.How good is that?

The great thing about super is that you never miss the boat — even a little super can help yourlifestyle in retirement The more years you do contribute to super, however, the bigger your

retirement benefit is going to be And your retirement income will be tax-free, if you retire on orafter the age of 60 (except for some public servants)

This chapter explains the rationale behind Australia’s compulsory super system and debunks somelongstanding myths about super I also give you an eight-step program to help you make the most ofyour super benefit

Understanding the RIPper Plan behind Super

Imagine a retirement where you pay no tax on your income Important changes made to the

superannuation rules in 2007 mean that you could be living a tax-free retirement: Most Australianswho retire on or after the age of 60 can expect to pay no tax on their super benefits

Superannuation is now the number one, tax-effective savings strategy for Australians — a

deliberate policy by the Federal Government to encourage individuals to save For those Aussies

on lower incomes, the Government promises to give you tax-free super money when you makevoluntary contributions to your super fund

Superannuation wasn’t always so popular Until the 1980s, having your employer accumulatesavings for your old age was a luxury for the lucky few — public servants and male full-time

workers in large companies At the beginning of the 1900s, actually reaching old age was a luxury,especially for men

Nowadays, Aussies are living longer and having fewer children Australia is ageing along with therest of the developed world, which means more people will be clamouring for their ‘right’ to theAge Pension and fewer people will be working to pay taxes to fund these lifetime incomes (seeChapter 2 for a look into the future)

The upside is that Australia is better placed than most other countries to tackle the demographicissues we’re now confronting, thanks to Australia’s compulsory superannuation system

In 1992, the world changed forever for Australian employees A visionary policy looking ahead

50 or so years was put in place I say ‘visionary’ because this policy, called the Retirement

Income Policy (RIP), is going to help save Australia’s bacon when all the baby boomers move

from full-time and part-time work, and eventually into retirement Historically, baby boomers areindividuals born between 1946 and 1961, although nowadays, for undisclosed reasons, you mayalso be considered a member of the baby boomer club if you were born in 1962, 1963, 1964 or

1965 — at least for the reporting purposes of the Australian Bureau of Statistics

Australia’s Retirement Income Policy has three limbs that the Federal Government hopescan raise everyone’s standard of living beyond relying solely on the Age Pension:

Safety net The Age Pension provides a taxpayer-funded basic retirement income for

those people who can’t fully support themselves The single rate Age Pension is set to atleast 25 per cent of Male Total Average Weekly Earnings (see Chapter 20 for detailsabout the Age Pension)

Super for everyone Superannuation Guarantee (SG) is the official term for compulsory

super contributions made by employers on behalf of their employees More than 90 per

cent of employees receive SG, which is considered a minimum level of super and notnecessarily enough to provide a comfortable retirement, especially if you enjoy the goodlife Your employer must contribute the equivalent of 9 per cent of your salary, although

SG started at 3 per cent of salary in 1992 and rose to 9 per cent from 1 July 2002 (seeChapter 6 for details about SG)

Top-up option with voluntary savings You can make voluntary super contributions or

have savings outside of super to boost your retirement kitty Super is a tax-effective option

for most Australians because the Government taxes super at a concessional tax rate —

you pay a rate of tax that is less than what you would ordinarily pay on income you

receive during the year The Government gives self-employed people and others the

opportunity to claim tax deductions when they make contributions (see Chapters 6 and 11)

The Federal Government is very keen for Aussies to boost their retirement savings bymaking their own super contributions In 2003, the Government introduced one of its more

innovative policies called the Super Co-contribution Scheme The Government puts extra money

in your super account if you make voluntary super contributions (see Chapter 11 to find out howyou can take advantage of this offer)

Our system is world’s best practice

Australia’s three-tiered retirement income system is often described as international best ​practice

Australia has a safety net for those unable to, or who have chosen not to, save for their retirement

We have a compulsory superannuation system that eventually will take some pressure off the

taxpayer-funded Age Pension, and the message is slowly getting through that the easiest way to afinancially stress-free retirement is saving more; either in your super or outside of your super

Are you planning to fund yourself over a 40-year retirement or do you think Australia can afford tofinance your retirement?

In the 1960s, the average period for collecting a government age pension was six years, among

OECD (Organisation for Economic Co-operation and Development) countries, reflecting lower life

expectancies In the future, the average period for claiming a government age pension is expected to

be between 30 and 40 years, which is going to place huge financial pressure on a country’s finances.Mainly European nations belong to the OECD, although Australia, Japan, Korea, Mexico and theUnited States of America are also members

For example, in October 2003, millions of Italians went on strike for half a day ​protesting the ItalianGovernment’s plans to increase the retirement age to ease the financial ​pressure on Italy’s pensionsystem At the time, an Italian worker must have paid into the country’s ​pension system for 35 yearsbefore retiring at a minimum age of 57

The strike was to no avail The Italian Government has raised the age for entitlement to a full

pension to 60 rather than 57 (effective from 2011), and increased the years of contributing to thesystem to 36 years, from 35 In 2008, the age for entitlement is 58 rather than 57; in 2009, 59; and in

2011, 60 Entitlement to the pension is also available to men aged 65 or over, and women aged 60

or over, provided they have contributed for at least 20 years

The Italian pension system apparently costs the country about 15 per cent of gross domestic product

Investing for the Long Tomorrow

Superannuation is nothing more than a long-term savings plan You or your employer contributes toyour savings plan and your money is invested to make more money That’s it, nearly

Your super earnings are reinvested, which means your super benefit accumulates at a much faster

rate thanks to the marvels of compound interest Compound interest is when you earn interest on

your interest or, in the case of a super fund, earn returns on your returns For example, assume youhave a $50,000 super account and you make no further contributions You can double your existingsuper benefit to $100,000 in fewer than five years if your investment is delivering a return of 15per cent a year after fees and taxes If your money is returning 9 per cent a year after fees and

taxes, you can double your money in eight years Your benefit can grow even faster than this whenregular contributions are boosting the amount your super fund can invest — earnings upon earningsupon contributions

The earlier you begin contributing to your super fund, the bigger your benefit can be,thanks to the amazing effects of compound interest

Retirement may seem a long way off, but the key to a successful long-term investment,such as those investments in your super fund, is keeping your eye on the ball, for the long haul.Your superannuation needs to grow for the next 15, 20 or 30 years, and even longer if you’re

planning to receive a tax-free pension in retirement from your super fund Keep these timeframes

in mind when making your super and investment decisions

Treating your super like overtime

If the idea of superannuation doesn’t excite you, yet, imagine, instead of super, that you were beingpaid overtime for work outside your normal work hours For example, say you earn $60,000 a yearand you worked just over 3½ hours of paid overtime every week for a year If this overtime totalled

$5,400 a year, you’d probably be checking your pay slip to ensure that you received your extra

money And if you expected to be accumulating this money every week, you’d be doing some

research on how much overtime your company usually paid, what you needed to do to be entitled toovertime and when you expected to be paid this extra money Now, close your eyes and, instead ofovertime, think of your compulsory employer contributions, otherwise known as SuperannuationGuarantee (SG) (I discuss SG in detail in Chapter 6.)

If you earn $60,000 a year, you’re entitled to $5,400 a year in SG, that is, the equivalent of 9 percent of your earnings Receiving that amount means you get nearly the equivalent of 47 hours of pay,paid into your super fund every three months, based on a standard 40-hour week

Forty-seven hours is more than a week’s work and you only pay tax on these contributions when itenters the super fund Plus, you probably pay a lot less tax than if you receive it as cash for workingovertime Over a year, 9 per cent of your salary works out to be the equiv​alent of nearly five weeks’pay Do you still need to close your eyes and imagine your super is overtime with tax breaks? Andyou don’t even have to work the extra hours to be entitled to this super

Introducing the Eight-Step Program to Super Success

Merely thinking about your super means you’re straddling the first major hurdle that most

Australians face when planning (or not) for their retirement — looking into your future

As an employee, you have your employer helping you with your retirement plans by making

compulsory super contributions In fact, nearly half of working Australians also believe theiremployer has at least some responsibility in providing them with information to help them plan forretirement, according to a 2006 financial literacy and retirement readiness study, conducted byconsulting company, Mercer Human Resource Consulting

If you’re self-employed, your super future is left entirely in your hands, which can be either

exciting or daunting

The eight-step program to super success is a practical tool to help you make the most of your

superannuation Follow this program to achieve success with your super:

1 Choose your fund.

Since 1 July 2005, most Australians have been able to choose their own fund You may evendecide to set up your own super fund (see Chapter 13) Or, you may be one of the minoritywho still are unable to choose the type of fund you wish to join (refer to Chapter 3 for the

different types of funds) I discuss fund choice in detail in Chapter 4, but note that the fund

you’re already in may be the best choice for you.

2 Get to know your super fund.

Chapter 7 explains a few no-cost ways you can get to know your super benefit and your superfund by doing a little bit of leg work and asking a few questions Every superannuation fundmember needs to do this as a bare minimum, even if you’re not interested in getting more

involved with your superannuation investment Your fund may also offer you other benefitssuch as low-cost financial planning services and cheaper home loans (see Chapter 10 for moreinformation)

3 Choose your investment options.

Most of Australia’s major superannuation funds give you different levels of choice about

where to invest your super (see Chapter 8 for details)

4 Choose the right level of insurance.

If you become ill or have an accident, paying your everyday bills is a bigger concern than

saving for your retirement Most super funds now offer competitive premiums for death or

death and disability insurance, and income protection insurance (Chapter 10 explains your

insurance options.)

5 Decide how much you want to contribute.

Contributing to your super fund is where you can have the greatest control and flexibility over

your super, whether you’re an employee, self-employed or not employed Making personal or

voluntary contributions can mean a bigger retirement benefit, which means you decide what

your retirement lifestyle can be (see Chapter 16) rather than relying solely on the GovernmentAge Pension (see Chapter 20) (I chat about the advantages of extra contributions in Chapters 6and 11.)

6 Make additional contributions by taking advantage of salary sacrificing.

If you’re an employee, a tax-effective way of topping up your super is to use salary

sacrificing, which is another way of describing the fact that you’re paying your additional

super contributions out of before-tax dollars (see Chapter 11 for the ins and outs of salarysacrificing)

7 Keep an eye on your employer.

You can check your super fund to see when your employer paid your superannuation

contributions (see Chapter 6, where I also take you through what happens if your employerdoesn’t pay your super, or if your employer becomes bankrupt)

8 Keep watch over your fund’s trustees or become a trustee yourself.

The annual report you receive from your super fund contains the names of your trustees and,usually, gives you some idea of the skills they hold to do the job If you’re an employee andyou belong to a fund run by your employer, you may be able to select your fund trustees (seeChapter 7) If you run your own fund, you are the trustee of your fund (see Chapter 13)

Confronting SUPERstitions

Some of the serious complaints I hear about superannuation relate to its complexity, level of

taxation and the cost of fees

‘Super is too complex’

I can’t argue with that complaint although changes made to the super laws in 2007, including theintroduction of tax-free super for most Australians, have significantly simplified the super system.Even so, this book can guide you through the rest of the super maze

‘Super is taxed too much’

For most Australians, super’s the best tax deal going around If you earn more than $30,000 a year,you pay less tax on superannuation earnings than on earnings outside of super (see Chapter 12).The tax benefits are even more enticing when you retire — tax-free retirement income is just thestart (see Chapters 18 and 19)

Paying tax on super isn’t exclusive to Australia even though our super tax system may be morecomplicated than many other countries After all, Australia is the only country that taxes

superannuation savings at three key points — the contributions stage, the earnings stage and, ifyou’re under the age of 60 or a long-term public servant, when you receive your super benefits.Complicated taxes, however, don’t mean higher taxes

You may think your super (and your fund’s investments) is the only financial product thatever gets taxed Not so You probably pay more tax on interest paid on your bank account than onyour super’s earnings Australians also pay a great deal in stamp duty and bank fees when they

purchase residential properties If you sell an investment property you have to pay capital gains

tax on any profit you make on selling, or income tax on your profit if you sell the property within

12 months of buying it These taxes, however, don’t stop Australia’s love affair with property

‘My super’s going to disappear in fees’

Opting For a Tax-free Retirement

More than 60 per cent of Australians haven’t worked out the amount of money they need to savefor retirement, according to the 2007 AXA Retirement Scope Study (see the sidebar ‘Working isthe new “retirement”’)

If you’re one of the 6 out of every 10 Australians who hasn’t yet crunched the numbers on

retirement, don’t panic Your retirement planning exercise is fairly straightforward

The Retirement Super Star in Figure 1-1, a summary of Part IV of this book, is a good startingpoint for discovering what’s in store for you financially, when you retire For example, in Chapter

16, I take you through the key questions you need to answer when working out how much super isenough

Working is the new ‘retirement’

Sixty per cent of working Australians expect to hold a job in retirement even though fewer than one

in ten of current retirees are working, according to the 2007 AXA Retirement Scope Study

Australians believe their ideal retirement age is 56, although they expect to retire at 62 WorkingAustralians believe they would still be fit and healthy to work in a paid job until they are 67, fiveyears beyond their expected retirement age of 62

The study, an international reference study on retirement involving over 11,000 interviews in 16