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Superannuation: Advantages and disadvantages

Advantages and disadvantages

Maximising the superannuation system isn’t easy.

When compared with the US’s 401(k), which is an employee-contributed retirement fund, Australia’s superannuation gives more advantages to wage earners.

Since superannuation is compulsory on all employers, employees don’t have to worry too much about their retirement fund. Employees are guaranteed a minimum contribution of 9.5 per cent of their basic wage.

Here are some pros and cons of super funds for retirement:

Eligibility

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  • As long as an individual is employed and earns at least $450, employers are automatically required to open up a superannuation fund and make employer guarantee contributions to it at least quarterly.
  • Domestic, underaged, and private employees who work 30 hours or more weekly are also eligible.
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  • Since different employers have different preferred fund managers for their offered super, employees who had changed jobs may find themselves paying for multiple fees on multiple super funds.

Fund management

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  • Companies usually hire professional fund managers to take care of their employees’ super.
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  • Professional fund managers have different fees. Employees could be paying more for a similar package that another fund management company offers at a lower rate.

 Contributions

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  • Employers are required to make separate contributions to their employees’ super. The minimum guaranteed contribution employers must pay is 9.5 per cent of their employee’s ordinary wage.
  • Employees are also allowed to top up their super through salary sacrifice or personal pre- and post-tax contributions.
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  • If an employee decides to make personal contributions through salary sacrifice and meets the 9.5 per cent minimum required contribution, employers are no longer required to contribute.

 Government support

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  • The government could match up to $500 in super contribution for individuals with salaries within the low-income threshold. Low-income earning individuals must meet the set criteria to be eligible for a government co-contribution.

Limitations and taxes
Starting July 1, 2017, the annual pre-tax contribution cap is $25,000 and post-tax contribution cap is at $300,000 over a period of three years. These caps apply to all ages.

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  • Super contributions within the contribution cap are taxed at 15 per cent.
  • Excess contributions that employees agree to take back are only taxed at 15 per cent before release.
  • Excess contributions may be considered as an income tax deduction at the request of the employee and approval of the Australian Taxation Office.
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  • Excess contributions that employees wish to keep in their super account are taxed at the highest marginal tax rate of 49 per cent.

Emergency cases and withdrawals
While generally discouraged, individuals may withdraw from their super only in the following cases:

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  • Compassionate grounds (payment of medical-, disability-, or death-related bills for the super account holder or for their dependents)
  • Severe financial hardship (payment for immediate living and family expenses)
  • Terminal medical condition (with an expert certification that the injury or disease may result in death within 24 months, if left untreated)
  • Temporary or permanent incapacity
  • Balance of the super fund is $200 or below
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  • Temporary residents in Australia are not eligible to make withdrawals unless they are leaving for good (in this case, super contributions will be taxed at 65 per cent).

This information has been sourced from the Australian Taxation Office.

Superannuation: Advantages and disadvantages
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