DIY Super For Dummies (Australian Edition)
Take control of your retirement savings by setting up a self-managed superannuation fund. Before you get started, take the test to see whether a DIY super fund is right for you. In this cheat sheet you’ll find some jargon-busters to help you decipher what your financial adviser is really talking about. You’ll also find a list of helpful websites, plus some points to consider when planning your retirement.
Taking the DIY Super 6C Challenge
You don’t have to be an expert in super, or be a guru in investing, or be particularly fond of paperwork to run your own super fund. Setting up and running a DIY super fund can be a relatively straightforward process, but you need to get it right from the start.
Six factors (all starting with the letter C) determine whether you have the opportunity, means, skills and inclination to drive your own super future, using a DIY super fund. Take this Super 6C Challenge:
Can you? Generally, nearly anyone can set up a DIY super fund, officially known as a self-managed super fund (SMSF); but, if you’re an employee, you can’t arrange your employer’s compulsory contributions to be paid into your SMSF unless you have the right to choose your own super fund.
Control. Taking control of your super is often the main reason for setting up a SMSF. Running a self-managed super fund also gives you flexibility over your level of super contributions, types of investments, tax planning and estate planning.
Cost. Generally, you need a superannuation balance of around $200,000 to $250,000, either on your own or among the other members who are to be in the fund, for DIY super to be cost-effective, according to a research report commissioned by the Australian Securities and Investments Commission (ASIC). If you don’t have $200,000 in super, it may still be cost-effective if you make substantial contributions in the first year or two.
Competence. Do you have sufficient knowledge of super and the skills to run a SMSF? Do you have access to advisers with SMSF and tax expertise, such as an accountant or tax-savvy financial planner? You also need to consider whether you’re going to do your fund’s administration or delegate that task to a service provider.
Compliance. You can expect fairly onerous reporting, monitoring and investment requirements. Are you up to it?
Commitment. DIY super is a lifelong journey — at least until you retire and maybe longer if your fund is going to provide you with a pension, or your children with superannuation benefits. Running your fund can take up quite a bit of time, too, particularly if you’re planning to be an active investor.
Unlocking the Language of Superannuation
Super funds can be a world of mysterious language. Don’t let terminology slow down your retirement planning; financial jargon rolls off the tongues of advisers and experts, but it can be hard to understand what they mean. Here are some of the super terms that you may encounter as you plan ahead for your super fund:
Self-managed super fund. The official name for the most popular type of DIY super fund. A SMSF can have no more than four members, and, ordinarily, all members must be trustees, and all trustees must be members. In the case of a single member SMSF, you need two individual trustees (including the member), or you must set up a corporate trustee, with yourself as director.
Superannuation Guarantee (SG). The official term for compulsory super contributions made by employers on behalf of their employees. An employer must contribute the equivalent of 9.5 per cent an employee’s ordinary times earnings, such as wages or salary. The SG percentage will progressively increase until it reaches 12 per cent from July 2025.
Concessional contributions. Super contributions that you (or your employer) make from before-tax income. Your employer, or you if you’re self-employed or otherwise eligible, can claim a tax deduction for such contributions.
Non-concessional contributions. Super contributions that you make from your after-tax income. You may hear this type of contribution called an after-tax contribution or even an undeducted contribution.
Tax-free component. This part of a super benefit is tax-free.
Taxable component. This part of a benefit is taxable when taken under the age of 60 (except when the low-rate cap is applicable), and tax-free when taken on or after the age of 60 (except when you receive an untaxed benefit).
Low-rate cap. A lifetime tax-free limit that applies to superannuation lump sums paid from a taxed benefit after the age of 55 but before the age of 60.
Taxed benefit. Taxed benefits are tax-free when received on or after the age of 60. Most super benefits, including benefits paid from SMSFs, are taxed benefits. Some benefits paid from certain public sector funds are untaxed benefits.
Untaxed benefit. A benefit that hasn’t been subject to super taxes, which means the benefit is subject to a higher rate of tax, when withdrawn, than are taxed benefits. A life insurance payout within a SMSF may be considered an untaxed benefit.
Visiting 5 Handy Superannuation Websites
You can access several helpful websites when you’re planning, setting up and running your self-managed superannuation fund. The following websites are handy references in your quest to understand super and your DIY super fund, from government departments to free, independent advice from experts.
Australian Taxation Office (ATO) for Superannuation. The ATO website gives you the rundown on many of the rules you must follow when setting up and running a DIY super fund. You can also find out about super contributions, super taxes and starting a DIY super pension.
MoneySmart. If you plan to have a corporate trustee, you need to apply to ASIC. ASIC also has a nifty consumer website called MoneySmart, which gives you financial tips and warnings about dodgy financial operators, and access to excellent online calculators that can help you work out how much super you’re going to have when you retire.
SuperGuide. A free and independent website for consumers on superannuation. The website was founded by DIY Super For Dummies author Trish Power. You can subscribe to a free, monthly newsletter, which includes a special section on SMSFs.
Centrelink. You can find out the rules relating to the Age Pension, and the latest payment rates. This website also gives you access to numerous publications that can help you when planning for your retirement.
National Information Centre on Retirement Investments (NICRI). You can access information on planning and saving for retirement, and post-retirement investing.
DIY Super: Preparing for Retirement
Your retirement can be a lot more relaxing if you do some planning for your super before you stop work; you need to ensure that you have enough money to last for the rest of your non-working life, and to decide what’s going to happen to the money when you die. Here are six ways to help you picture what your retirement is going to look like, financially:
Make sure your money lasts. The general rule when planning for retirement is: If you want a similar lifestyle to the one that you’re enjoying during your working life, you need a minimum of 60 to 65percent of your pre-retirement income in retirement.
Check you can access your super. Most Australians aren’t permitted to withdraw a super benefit before the age of55 when retiring, except in exceptional circumstances. For any Australian born after June 1964, you can’t access your super benefits until you turn 60. The restriction on accessing super benefits is known as preservation.
Choose an appropriate income stream. You can cash your super account and use your SMSF money to purchase commercially available pensions. If you intend to start a pension within your SMSF then you have two pension options.
Understand what tax you pay. If you’re aged 60 and retired, you can receive your SMSF benefits tax-free — as a lump sum or as an income stream (regular payments over a period of time). If you retire before the age of 60, you’re likely to pay tax.
Assess your eligibility for the Age Pension. Around 80 per cent of all retirees over the Age Pension age receive a full or part Age Pension.
Consider any estate planning issues. You may be able to choose to pay your spouse or dependent children (under a certain age) an income stream when you die, or you can leave the balance of your super account to your family as a lump sum.