Super made easy by YourLifeChoices

OCTOBER 2016

Super made easy

Take control of your super options superannuation retirement planning Age Pension retirement income risk profile contributions transition to retirement accumulation pension investment lifestyle returns funds

Access your super

sooner than you think If you’re over 56, you can access your super while you’re still working. Transition to retirement turns your super into a regular income, meaning you could work less while maintaining the same take-home pay, or grow your super faster by paying less tax. Learn more at australiansuper.com/56matters or call 1300 300 273.

Transition to retirement strategies can be complex are not suitable for everyone. You should seek advice to make sure it’s right for you. This general advice doesn’t take into account your objectives, situation or needs. Before deciding, consider your financial requirements and the relevant PDS available at australiansuper.com or calling 1300 300 273. AustralianSuper Pty Ltd. ABN 94 006 457 987, AFSL 233788, trustee of AustralianSuper ABN 65 714 394 898. Issued in October 2016.

uperannuation is fast becoming our greatest source of wealth – overtaking the family home – so it’s important to understand the way it actually works. Whether you’re in the accumulation or decumulation phase, the rules that apply to super, and how it interacts with the Age Pension, can have a significant impact on your income in retirement. Much of the documentation that is offered about super is in language that isn’t always easy to comprehend so, as Australia’s most independent source of simplified retirement information, YourLifeChoices has taken on the task of making super easier to understand.

Contents Why save in super? Understand the purpose of superannuation and its place in your retirement income

Your super options Choose the type of fund that best suits your needs

Make the most of your retirement Tips for addressing the important retirement questions

Understanding your super investments Assess if your super still has the right investment balance

Not only have we taken the most complex parts of super and broken them down into plain English, we’ve also ordered this information in a way that will allow you to use it as a roadmap to your super, whether you are planning your retirement, transitioning to or already retired.

Super rules simplified How the most common rules apply to you

How is super taxed? Can changing the way you contribute save you money?

And thanks to our sponsor, AustralianSuper, we’ve also been able to provide the answers to the four most pressing questions about super.

Reaching preservation age What options you have when you gain access to your super

Is a TTR strategy right for you? Noel Whittaker addresses the pros and cons of transitioning to retirement

How does super work in retirement? Retirement isn’t the end of your superannuation choices

By tackling the complex issues, YourLifeChoices continues to give you the information and knowledge you need to make the difficult decisions to maximise the fun in your retirement. Debbie McTaggart Managing Editor

A-Z of Super Refer to this hand glossary of super and retirement terms

Four most asked super questions Paul Johnstone answers the most common super queries

8-9 10-11

16-17

How long will your super last? Evaluate whether your savings will support your lifestyle expectations

Age Pension and your super Maximise your retirement income by understanding how the system works

Resources Useful resources at the click of your mouse

4 7 12 14 19

YourLifeChoices Super made easy October 2016

Why save in super? Superannuation – chances are, if you’ve worked in Australia in the last 25 years, your super savings could be the key to funding your retirement.

ntroduced by the Keating Government in 1992, the aim of superannuation is to enable all working Australians to accumulate savings that will help to fund their retirement by either replacing or supplementing the Age Pension. Under the Superannuation Act, an employer is required to pay superannuation guarantee contributions (SGC), which are currently paid at a rate of 9.5 per cent of an employee’s salary. There are plans in place to gradually increase this to 12 per cent by 2025, but the legislation to enable this has been frozen by the Federal Government. One of the major incentives for saving in superannuation, both through employer SGC and contributions made by individuals, is favourable tax benefits. Utilising a salary sacrifice arrangement enables employees to easily access these tax benefits. These contributions are commonly referred to as concessional contributions and are capped at $30,000 for those under 50 years of age and $35,000 for those over 50. Non-concessional contributions from after-tax salary can also be made. These are typically utilised by those approaching retirement to boost their superannuation savings or as a taxeffective investment of a windfall, such as an inheritance, profit from the sale of a house or an insurance payout. The current annual limit on nonconcessional contributions is $180,000 per year, although a scheme does exist whereby $540,000 can be made in one year, as long as no further contributions are made in the following three years. Depending on your age and hours worked, there may be restrictions on whether you are entitled to employer SGC and/or able to make your own personal contributions. Of course, the amount you pay into superannuation is only one part of the story. Through investment of these contributions by fund trustees, individuals hope to see their balances increase thanks to

YourLifeChoices Super made easy October 2016

returns on such investments and compound interest. It’s incredibly important to bear in mind that superannuation is a long-term savings plan and returns should be measured over a period of years. Also, as investments can go down as well as up, it’s important to select carefully the risk profile attributed to your superannuation fund. The one question most people want to know about super is, how much do you need? This varies depending on the lifestyle you hope to have in retirement, but really, it's more important to maximise the savings you have by ensuring they are in a fund that offers the best returns and the lowest fees. And finally, access to your superannuation funds is restricted until you reach preservation age, which is determined by your year of birth. This extended period of saving, investing and accumulating a nest egg should enable you to generate an income in retirement. Remember, super should be a lifetime investment.

Your super options – which type of fund?

Before you make a decision on which fund is right for you, it helps to understand the features of the five major types.

he most common types of superannuation funds are industry, retail, MySuper, public sector and self managed, but what does each type of fund offer?

Industry funds Industry funds evolved from the wishes of unions and industry leaders who believed an income in retirement wasn’t just for the wealthy and so fought for their members and employees to have access to super. Historically, these funds were exclusive to specific industries but now, more often than not, these funds are open to everyone as ‘public offer’ funds. They are often referred to as not-for-profit funds because all profits made through investment of members’ superannuation savings are reinvested into the fund to ultimately benefit the member. Industry funds do not pay commissions to financial planners and fees are there to cover the cost of running the fund only, so they generally boast low fees.

Retail funds Not to be confused with an industry fund for the retail sector, banks and financial institutions, such as insurance companies, developed retail funds as a way of investing their clients’ money for retirement. Retail super funds are attractive to those who may want their super managed alongside their other financial products, or who seek a wider range of investment capabilities. As a result, these funds are often recommended as part of an overall investment review by planners who receive commissions or bonuses from the fund. Retail funds provide investment returns to members, as well as deliver profit to shareholders, and as a result, fees may be higher than industry funds.

MySuper Introduced in 2013 as part of the then government’s Stronger Super reforms, these funds are much simpler, with fewer options than retail and industry funds. However, MySuper accounts can also be offered by retail and industry funds. These lowfee funds are designed to help those with limited incomes to make the most of their superannuation

contributions. You can also opt-out of the life insurance component so all your contributions go towards your retirement savings.

Public sector funds Public sector funds are for those employed by state or federal governments. The fees are generally lower than others and if you have been employed in the public service for some time, you may have defined benefits status, where you will be paid a set income in retirement, regardless of the performance of the fund.

Self managed super funds (SMSFs) SMSFs give individuals the opportunity to have more say on how their retirement savings are managed. There are strict controls over the amount of money needed to start such a fund and the requirements of those managing SMSFs are similar to those of being a company director. Fees for managing an SMSF are typically high and you are fully responsible for any investment decisions. YourLifeChoices Super made easy October 2016

Sponsored message from AustralianSuper

How to make the most of your retirement Georgie Williams talks about the factors that can shape your retirement, and the simple steps you can take now to ensure you make the most of your future.

lanning for retirement isn’t always easy, but it matters. It’s never too late, or too early, to start preparing.

Different things matter to different people, but having a retirement plan is important for each and every one of us. And it’s not as hard as it seems.

There are three easy steps to take to plan for retirement: • set your financial goals • build your super savings, and • manage your retirement income.

Setting your financial goals No matter what stage of life you’re in, it’s important to set financial goals that are specific, measurable, and achievable. By writing down and referring back to your goals, you can track your progress and gain a better understanding of your financial profile. Before noting your goals, ask yourself the following questions: What money will I live on in retirement? Think about how long you might need your retirement savings to last. With current life expectancies, and depending on when you retire, your retirement income may need to last 20 years or longer. How much super will I need? Whatever your retirement plans, you’ll need money put away to meet your daily expenses, as well as any unexpected costs. How much you will actually need also depends on any outstanding debts you might have.

Transition to retirement can be a great way to grow your super savings while you’re still working. Once you reach your preservation age you could: • access your super early • save tax, and • grow your super.

Manage your retirement income When you’ve reached your preservation age and have either permanently retired or changed jobs after turning 60, you can access your super as: • a regular income by opening a Choice Income account • a one off lump sum, or • a combination of the above. And don’t forget – before making any big decisions about accessing your super, it’s always a good idea to seek help or advice. Georgie is the Group Executive of Engagement, Advocacy and Brand at Australia’s largest superannuation fund, AustralianSuper, and has 20 years’ experience in the financial services sector.

Will I receive money from a government Age Pension? It’s important to find out if you’re eligible for a government Age Pension – but don’t rely on it as your sole income as policies can change. Instead, use your super to top up any government Age Pension to which you may be eligible.

Start building your super savings Even small savings today mean you could have more for retirement down the road. To make the most of additional contributions, it’s best to think about how you add to your super – before or after tax – and not just how much. 6

YourLifeChoices Super made easy October 2016

This article has been sponsored by AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788, the Trustee of AustralianSuper ABN 65 714 394 898. The article contains general information and you should consider if it is right for you.

Understanding your super investments Superannuation is something that most of us have held for several years, but as life stages change, a review of your investment options is often necessary.

set-and-forget approach to superannuation may seem preferable to trying to fully understand what can be a complex financial arrangement, but taking charge of your retirement savings is often the best way to maximise your return. As your financial goals are likely to change as you enter your 50s and 60s, this is a particularly good time to review your superannuation savings strategy. As equally important as reviewing and understanding your annual member statements to evaluate your fund’s performance, fees and net benefit, is considering if your risk profile has changed. This is often the case as you approach retirement and it usually has an influence on your choice of investment mix. And by understanding the way in which your investments deliver returns, you can evaluate whether they fit your individual needs and retirement goals.

Your four investment types:* Growth – 85 per cent in shares and property, with the aim for a high return. Balanced – 75 per cent is invested in property and shares for higher returns, with the remaining 25 per cent invested in fixed interest (where there is a set return) and cash. Conservative –30 per cent is invested in shares and property and the remainder in fixed interest and cash, and typically delivers a lower level of return. Cash – 100 per cent is invested in deposits with regulated Australian deposit-taking institutions or a capital-guaranteed (where the initial amount invested is repaid at the end of a minimum period) life insurance policy. The aim is to ensure your capital remains guaranteed and earnings are not reduced as a result of losses on the investment. The volatility of the market is only one factor to consider when deciding on your investment mix. You will need to assess how long you expect your superannuation to cover your anticipated income in retirement – and don't forget inflation may mean that your income has a diminished purchasing power as your retirement years progress. Discussing your goals and finances with an advisor can help you

weigh up these factors to ensure you choose the right investment mix for your situation. Remember, you can opt to change your investment mix at any time to enable you to achieve your shortand long-term goals, without having to change superannuation funds. Of course, it’s also important to remember your goals once you decide to start accessing your super. After years of saving it may be tempting to opt for a lump sum withdrawal, but you should consider how this will meet your needs in the long term. You may be better to opt for a product that delivers a regular income to supplement a Government Age Pension. * The terms used and percentages invested can vary, so check with your superannuation fund for its specific terms and conditions.

YourLifeChoices Super made easy October 2016

Super rules simplified While it’s a challenge to understand all the rules applying to super, grasping the basics should make this form of saving a lot simpler.

here are many rules that must be adhered to when it comes to superannuation, which can mean the system is often perceived as complicated. However, breaking super down into its three phases – accumulation, transition to retirement and pension – makes it much easier to understand.

Accumulation phase These are the years during which you build up your super savings, mainly through employer superannuation guarantee contributions, salary sacrifice and non-concessional contributions. So what are the main rules you need to know during this phase? Superannuation guarantee contributions (SGC) If you’re over 18 and earn more than $450 before tax in a calendar month, then your employer is required to pay 9.5 per cent SGC into your chosen super fund. If you have not nominated a fund, then your employer must pay SGC into a default super fund that offers a MySuper account option. These contributions are classed as concessional contributions. Salary sacrifice You can make your own pre-tax contributions via your employer payroll. As well as giving your super balance a boost, you may be able to reduce your tax liability as these contributions are only taxed at a rate of 15 per cent, which may be lower than your marginal tax rate. These contributions are also classed as concessional, so you will need to ensure you don’t exceed the current caps of $30,000 for those under 50 years of age and $35,000 for those 50 and over.

Non-concessional contributions You can also make non-concessional super contributions of $180,000 per year if you’re under 75 years of age. Furthermore, if you're under 65 years of age, you can use the ‘bring forward’ rule. This allows you to deposit up to three years worth of contributions – $540,000 – in a lump sum. By using this rule, you will be excluded from making any further non-concessional contributions for three years. Tax is not paid on such contributions and investment earnings are taxed at 15 per cent (as long as your salary and SGC combined does not exceed $300,000). Low Income Super Contribution (LISC) Those who earn less than $37,000 per annum may be eligible for the LISC. This is a contribution by the Government of up to $500 per annum to cover the tax levied on super contributions. To ensure the LISC is paid, you will need to provide your tax file number to your super fund. Government co-contribution If you earn less than $51,021 and make aftertax contributions to your super fund, you may be eligible for the Government co-contribution. Depending on how much you earn and how much you contribute, the Government will make an additional contribution. Spouse contribution If your spouse earns less than $13,800 per annum, then you can make a superannuation contribution on their behalf and claim a tax offset of up to $540. A combination of the above contributions, you will assist your super balance grow over your working life. Contributions made during the accumulation phase cannot be accessed until you reach preservation age, except in certain cases, which include extreme financial hardship, terminal illness and leaving Australia permanently. You need to apply to your superannuation fund for early release of your money and it should be noted that qualifying criteria is stringent and there is no guarantee your application will be approved.

YourLifeChoices Super made easy October 2016

Transition to retirement (TTR) phase

Pension phase

Once you reach your preservation age – between 55 and 60 depending on your year of birth – you can access your super savings in order to enable you to reduce the hours you work or boost your super savings in preparation for retirement.

The pension phase commences once you start a TTR pension and, until you reach 65, the rules applicable are those for TTR. However, once you have reached preservation age and have fully retired, access to your super is unrestricted. You can take some, or all as a lump sum, or commence an income stream, and you are still able to make contributions to your super fund.

During the TTR phase, you can commence a pension by transferring some or all of your super balance to an income stream, such as an account-based pension. You cannot take this amount as a lump sum; it must be used to provide a regular income by withdrawing between four and 10 per cent per annum.

… if you’re under 65 years of age, you can use the ‘bring forward’ rule Your employer must continue to make SGC contributions on your behalf and, should you choose to do so, you can also make salary-sacrifice contributions to boost your super. Whether or not you choose to reduce your hours is up to you. For those under 60, your pension payment will be a combination of a taxable component and a taxexempt component. Your superannuation fund will be able to provide you with a statement detailing the amount of each. For those aged between 60 and 65, your pension payment will be tax free.

Once you reach 65, you can have unrestricted access to your superannuation savings without having to retire. However, making contributions to your super fund is more difficult. To be able to make super contributions from age 65 onwards, you must meet a work test. The work test requires you to undertake 40 hours of paid work, in any 30-day period, during the financial year in which you plan to make contributions. If you are still working, employers must continue to pay SGC regardless of your age. However, voluntary concessional (over and above the SGC) and nonconcessional contributions can no longer be made when you reach age 75. These rules above are an overview to the most common that apply to each phase. As announced in the Federal Budget 2016/17, changes to the rules that apply to superannuation are being introduced into legislation, which if passed, will apply from 1 July 2017. YourLifeChoices Super made easy October 2016

A–Z of Super It’s often said that a little knowledge is a dangerous thing, but when it comes to superannuation, you really can never know too much.

uperannuation is often seen as complex, especially when terms, phases and acronyms that you’ve never heard before, or simply don’t understand are used. To encourage you to take a more active approach in managing and understanding your retirement savings, our A–Z of Super will help you decipher the code.

ASX – Australian Stock Exchange

Accumulation fund – a superannuation fund that accepts both employer and personal contributions.

ATO – Australian Tax Office

Adjusted taxable income – income test measure used by the ATO to determine your tax liability. Age Pension – a social security benefit paid by the Federal Government via Centrelink. Allocated pension – also known as an accountbased pension. A retirement income product that allows you to make a lump sum investment, usually from superannuation, to provide a drawn-down annual pension of between four and 14 per cent, depending on your age. Annuity – a periodic payment made to a person in return for a lump sum investment. APRA – Australian Prudential Regulation Authority ASFA – Association of Superannuation Funds of Australia

Assessable income – income earned before allowable deductions. Assets – possessions, savings or property. Asset test – applied to Age Pension claims as a method of testing your eligibility. Binding death benefit nomination – a legally binding nomination made by a trustee or member of a superannuation fund as to who receives their benefit upon their death. Centrelink – the agency of the Australian Government that manages social security payments and allowances. Commutation – process of converting a pension into a lump sum. Complying funds – superannuation funds that comply with operating standards and are therefore eligible to receive concessional taxation treatment. Compound interest – interest that is accrued on an investment that, in turn, is reinvested to earn more interest.

AFSL –Australian Financial Services Licence

Concessional contribution – superannuation contributions you make to which the concessional tax rate (15 per cent) is applied.

ASIC – Australian Securities and Investment Commission

Concessional contribution cap – the limit to the amount of concessional contributions you can make.

YourLifeChoices Super made easy October 2016

Contribution tax – tax levied on contributions to superannuation funds. Defined Benefit Fund – in contrast to an accumulation fund, a formula is used to calculate the retirement benefit based on average salary and years of membership in the fund, so your income is defined and not dependent upon market fluctuations. Equity – value of an asset after any debt owed on it is deducted. Equity release – accessing capital that has accrued on an asset, such as property, whereby you receive a lump sum or regular payment. You remain the legal owner and the debt is paid when the property is sold. Financial advisor – a person authorised (by operating under an ASIC licence) to give financial advice. Financial plan – a plan created, usually with the help of a financial advisor, to help you achieve your financial goals. Franking credit – a tax credit that shareholders receive on share dividends on which an Australian company has already paid tax. Gearing – investing borrowed money. Income stream – an investment that provides a regular payment. Income test – one of two tests that is applied to Age Pension claims as a method of assessing your eligibility. Industry super fund – originally a fund open only to members who are employed in a specific industry. However, most funds now allow anyone to join. These funds are ‘not-for-profit’ so all profits are put back into the fund to benefit all members.

Non-concessional contribution – contributions to a super fund made by an individual where no concessional tax rate has been applied. Offset – a tax deduction that reduces the amount of tax paid. Preservation age – the age, determined by your year of birth, at which you can access funds from your superannuation. Revisionary pension – a pension that is paid regularly, rather than as a lump sum, to an eligible dependent after the death of a fund member. Salary sacrifice – pre-tax salary that is paid into a superannuation fund as additional contributions. Self Managed Super Fund (SMSF) – a fund that is managed by its members who are also trustees. Superannuation Guarantee Contribution (SGC) – compulsory amount paid into a nominated or default super fund by an employer on behalf of employees. Spouse contribution – superannuation contributions made on behalf of a spouse who earns below a certain amount. Transition to Retirement (TTR) pension – a means to access superannuation benefits once preservation age has been reached, while still working and being able to salary sacrifice employment income as concessional contributions. Work test – to be able to make superannuation contributions between the ages of 65 and 74, you must meet the requirements of a work test defined by the ATO. YourLifeChoices Super made easy October 2016

How is super taxed? We may all accept that superannuation offers us a tax-effective means of saving for retirement, but just how does tax on super work?

any of us accept that superannuation is a tax-effective means of saving for retirement, but fewer will understand just how our money is taxed within the system. This simple guide outlines the basics.

Before-tax contributions These are more commonly known as concessional contributions as, by making them direct to your superannuation fund from your salary, they usually have the effect of reducing your taxable income – possibly even putting you into a lower tax bracket. Concessional contributions include the compulsory 9.5 per cent superannuation guarantee contribution made by your employer, any additional contributions your employer makes on your behalf (i.e. some employers actually contribute more than the 9.5 per cent or make an annual bonus contribution) and salary-sacrifice contributions you choose to make. If you are over 50 years of age, then you can contribute up to $35,000 per annum (including compulsory employer contributions) to your superannuation before tax. If you’re under 50, then $30,000 is the cap that applies. These contributions are taxed at 15 per cent, which may be less than your marginal rate for income tax. Depending on how much you earn, salary-sacrifice contributions can be an effective tax strategy. There are penalties for exceeding concessional contribution thresholds.

After-tax contributions One way to boost your superannuation once you have maximised concessional contributions is to make nonconcessional contributions to your superannuation. 12

YourLifeChoices Super made easy October 2016

These include any voluntary payments made from your take-home (after tax) salary, contributions for your spouse and any lump sum amounts, possibly from the sale of a house or an inheritance. You can currently contribute up to $180,000 per annum after tax to your super and you will pay no tax on this amount. This is because you have already been taxed once on such income. If you exceed this cap in a financial year, and you’re under 65, you will trigger the ‘bring forward rule’, which is a three-year period in which you can make up to $540,000 of non-concessional contributions. If you’re 65, the bring-forward rule doesn’t apply, and non-concessional contributions are subject to a work-test. The Government co-contribution, should you qualify, is also classed as a non-concessional contribution, but it does not count towards the non-concessional cap.

Withdrawals from superannuation If you’re over 60, and meet the requirements of being able to access your superannuation, then any money you withdraw is generally tax free. You can take such withdrawals as a lump sum or an income stream. If you are under 60, a portion, or a ‘component’ of your superannuation balance may be tax free. To find out how to calculate your tax-free component, visit ATO.gov.au. This may also appear on your superannuation statement. The taxable component is subject to different rates of tax depending on your age and whether or not contributions were taxed or untaxed when paid into your superannuation.

What should you do when you reach preservation age? When planning your retirement, the first important landmark you will reach is your preservation age – but what does this actually mean? What is preservation age? Your preservation age will fall between 55 and 60, dependent upon your year of birth. Thankfully, it’s not complicated to work out, as the table below shows: Date of birth

Preservation age

Before 1 July 1960

1 July 1960 – 30 June 1961

1 July 1961 – 30 June 1962

1 July 1962 – 30 June 1963

1 July 1963 – 30 June 1964

From 1 July 1964

Of course, it’s not just reaching preservation age that enables you to access your superannuation – you also need to be retired or have commenced a transition to retirement (TTR) income stream.

Once I reach preservation age, what should I do? When you reach your preservation age, you basically have three options: • do nothing and carry on working • start a TTR strategy, or • retire completely Of course, which option you choose will depend on your individual circumstances, such as health, financial position, and career and retirement goals. Whatever you decide to do, it’s important you discuss with those closest to you, as well as consulting an independent financial advisor to ensure your retirement goals are on track. Briefly, here’s an outline of what each option means:

Do nothing and carry on working OK, fairly self-explanatory but if work is important to you, for financial, social or career reasons, then giving it up just because you can access your super probably makes very little sense. If you’re healthy and enjoy what you do, then by all means carry

on. However, you may wish to consider making additional contributions to your superannuation if you can afford to.

Start a TTR strategy Transition to retirement, as the name suggests, is a means by which you can cut back on the hours you’re working, get used to potentially having a lower income and to road test retirement. A TTR strategy also enables you to convert a portion of your superannuation balance into regular income payments, while you divert your salary from your job into your super savings. In addition, TTR offers possible tax benefits and the ability to contribute more to your superannuation, which may be of financial benefit.

Retire completely This is a big step, but if your health dictates or your finances allow, then no longer being in the workforce may seem appealing. Before you make the leap, why not try YourLifeChoices Are you ready to retire quiz? And remember, retiring completely means you will probably have to live entirely off your savings, or the income they generate through investment, so seeking the correct financial advice is definitely recommended. YourLifeChoices Super made easy October 2016

Is a transition to retirement strategy right for you? Preparing for life in retirement shouldn’t be taken lightly and, as Noel Whittaker explains, there are strategies that can make the transition easier.

ransition to retirement strategies (TTRs) were introduced in 2006, in tandem with the Howard–Costello reform of the superannuation system. At that time, Australia was facing a growing skills shortage, with the oldest baby boomers then nudging 60 years of age. As more retired, so grew the difficulty of finding experienced replacements. At the same time, many older workers wanted to cut down on their hours and were happy to accept a reduced wage for doing so, but they did not want to give up work completely. The problem was accessing super to cover this reduction in income. Even though withdrawals from super became tax free from age 60, employees could not access their super until preservation age (55 if born before I July 1960) unless they were prepared to sign a statement that they were permanently retired. And once they reached 60, they had to resign from a job to access their super. TTRs solve this problem by enabling those who have reached their preservation age to have their cake and eat it too. Australians can now access their superannuation as an income stream while continuing to work, and take advantage of taxsaving strategies. If you are aged between preservation age and 60, the income from a TTR is fully taxable less a 15 per cent rebate – if you are 60 or over, it is tax free. The ultimate bonus for those approaching retirement is that superannuation funds become tax-free funds once an income stream has commenced. Obviously a tax-free fund will receive higher after-tax returns than one that is paying 15 per cent tax. What makes TTRs particularly attractive is the ability to continue contributing to super while drawing a tax-free income from the fund; it enables anyone adopting the strategy to take advantage of the difference between the 15 per cent tax on contributions and their marginal tax rate. Proposed changes to superannuation announced in the May Federal Budget will, if legislated,

YourLifeChoices Super made easy October 2016

make TTRs less effective from 1 July 2017. The amount that can be contributed as a concessional contribution for people over 50 will be reduced from $35,000 to $25,000 a year, and the tax on contributions will be increased to 30 per cent for people who earn $250,000 a year or more. Also, the fund will continue to pay income tax at 15 per cent even though the TTR has commenced. Nevertheless, TTRs can still be useful for older workers, especially if you are 60 or over. Provided you earn less than $250,000 a year, it enables you to maximise the amount of gross income you can receive; it is effectively taxed at 15 per cent instead of your marginal rate. Also, if your budget is tight, you can make up for your pay packet reduction due to increased salary sacrifice by taking a tax-free pension. Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Noelwhittaker.com.au

How does super work in retirement? Just as important as choosing the right superannuation fund is choosing what to do with your savings in retirement.

fter years of working hard you should hopefully have built a superannuation nest egg that will, in part at least, fund your years in retirement. How long that will be depends on several different factors, but no one wants to see their money run out. So what are your options?

Lump sum If youâ&#x20AC;&#x2122;ve scrimped and saved over the years there may be a temptation to take the balance of your superannuation, spend until it runs out and then rely on an Age Pension. But can you take the gamble? Clever investment and careful budgeting may mean that a lump sum lasts the entirety of your retirement, but volatile investments, less than anticipated returns and unforseen expenses, can quickly erode your savings. And while many may consider an Age Pension as a potential back-up plan, changing legislation could mean that somewhere along the track you may find yourself with much less of an Age Pension to live on, or perhaps even, ineligible altogether.

Account-based pensions An account-based pension (also known as an allocated pension) is an increasingly popular means of providing a regular income in retirement. You can withdraw a portion or all of your superannuation to open your account-based pension, from which you draw an income (there is a minimum annual withdrawal depending on your age). The balance continues to be invested so any positive returns will be added to your account. This means that your savings continue to grow and may last for longer. Depending on your overall financial circumstances, once you reach eligibility age you may be able to receive an Age Pension to supplement the income from your account-based pension. An income stream such as this offers flexibility by enabling you to alter your payments (within the minimum and maximum limits) and choose your investment options. However, there is no guarantee your money will last as long as you do.

Annuities If you simply want a guaranteed payment for a defined period of time, then an annuity could be worth considering. When purchasing your annuity, you decide how many years you want it to last and whether you would like it to be indexed in line with inflation or a certain percentage each year. Payments can be received monthly, quarterly, six monthly or annually. As with an account-based pension, you may be able to also receive an Age Pension, depending on your overall financial circumstances. However, unlike an account-based pension, an annuity is not flexible and you will not be able to make a lump sum withdrawal or have a say in how your money is invested.

Where do you go to get one? Most life insurance companies and financial services organisations provide these different types of income stream products. You can approach these organisations directly, at which point they will usually direct you to one of their financial planning groups, or you can seek the advice of an independent financial planner. You should always seek professional advice. YourLifeChoices Super made easy October 2016

Sponsored message from AustralianSuper

Four most asked super questions It’s common to have a lot of questions about super and retirement. Financial advisor Paul Johnstone answers the four that are asked most frequently.

How much super do I need to retire?

How do I take an income? AustralianSuper has created Choice Income to help your money last once you retire. It does so by turning your superannuation benefits into a regular income.

Retirement should be a time for enjoyment, not money worries. That’s why having a retirement plan is vital for each and every one of us. We are living longer, so it’s important to be prepared financially long after our working lives end. The three-step process to a stress-free retirement should include: setting financial goals, building your super savings and managing your retirement income. AustralianSuper financial adviser, Paul Johnston, says that when setting your financial goals, it’s important to be realistic. “Money will be needed for everyday expenses and unexpected costs for 20 years or more,” Paul says.

Part or all of your super balance can be used to open an account. At its simplest, it allows an income to be drawn from the account while the remainder of your super balance is invested and continues to earn returns. A minimum balance of $25,000 applies if you are still working, or $50,000 if you have retired.

Money will be needed for everyday expenses … for 20 years or more.

“Exactly how much is required will depend on your level of debt and lifestyle expectations. Some people may be eligible for the Government Age Pension but it should not be relied upon as a sole income.

“It works by providing access to the rest of your money when you need it and, better still, providing scope to reduce the tax you pay on your retirement savings,” Paul says.

“The best thing is that it’s never too early or too late to start preparing, and you can start today. Every little contribution counts.”

“For example, you won’t pay tax on your investment earnings and, if eligible, you may receive a 15 per cent discount for the tax you pay on your retirement income.”

There are two ways to add to your super. The first is through before-tax contributions, by agreement with your employer – commonly known as salary sacrifice. Secondly, after-tax contributions can be made from your take home salary. Before committing to either, consider what mix of before-tax and after-tax contributions will provide the best result. Contribution caps apply to both before and after tax contributions. You may need to talk to your payroll manager to see whether your employer allows salary sacrifice into super.

Any investment returns are deposited into your Choice Income account. AustralianSuper keeps its fees low because it doesn’t pay commissions to advisers or give profits to shareholders. In total, there’s an administration fee of $1.50 a week, plus 0.11 per cent of your account balance each year (up to a maximum of $750). This low fee structure and no-cost account set-up means more money for you to enjoy.

Using AustralianSuper’s Contributions Adviser calculator can help you determine an optimal solution. Other incentives, such as the Government cocontribution, may also enhance your super savings. This applies if you earn less than $51,021 a year in 2016-17, including assessable income, fringe benefits and reportable super contributions. 16

YourLifeChoices Super made easy October 2016

Compare AustralianSuper’s low fees against other funds by using Chant West’s Super Apple Check tool*

When can I access my super? To access your super savings, generally you need to have permanently retired from work and have reached your preservation age. Your preservation age is 55 if you were born before 1 July 1960. Higher preservation ages apply to younger people.

There are limited circumstances for early access but these relate to specific medical conditions or severe financial hardship. If you’ve reached your preservation age, you can also access some of your super while you're working with a transition to retirement strategy. You can use this strategy as an extra source of income and cut back on your working hours, or you can take advantage of the tax-saving opportunities to increase your super savings. Even if you have money in your super, you can still apply for the Government Age Pension. Supplementing payments from your income account with any Age Pension payments means more money every fortnight when you retire. Some of your savings may even outlive you. If that happens, make sure it goes where you want. Simply make a binding nomination request to your super fund to enable a one-off payment to your nominated dependants or legal representative.

How should I invest? Your age and individual circumstances have a big influence on how your money should be invested in super during your life. This is why your investment timeframe is one of the most important factors to consider when choosing your investment option. According to Paul, if you have a short investment timeframe (five years or less) preserving your capital is likely to be your main focus. You may not want to lose money due to

short-term fluctuations in investment markets. So your key risk is volatility of investment returns. “If you have a much longer investment timeframe (20 years plus) your focus is likely to be on growing your capital and maximising your returns,” he says. “Volatility is not such a big issue as you probably have time to ride out short-term ups and downs in the market. Your key risk is that your capital doesn’t grow sufficiently above inflation to meet your objectives over the long term.” Volatility and inflation are two of the key risks that can have an impact on your investments. It’s important to know about other risks that can also affect your super in different ways, including interest rate movements or changes to super rules and regulations. Before making any decisions about your super, always seek advice. AustralianSuper has produced a series of Fact Sheets that can help you manage your super. Or visit Australiansuper.com/retirement for free retirement and financial planning seminars, or assistance online or over the phone. AustralianSuper consultants are available on 1300 300 273 from 8am-8pm on weekdays to answer your questions. * Super AppleCheck is provided by research consultant Chant West Financial Services. While AustralianSuper has paid Chant West a fee for making the service available to you, AustralianSuper has no influence over the research results and ratings and does not accept responsibility for any loss or damage caused by the service. This article has been sponsored by AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788, the Trustee of AustralianSuper ABN 65 714 394 898. The article contains general information and you should consider if it is right for you.

YourLifeChoices Super made easy October 2016

How long will your super last? How long your superannuation will last really depends on how quickly you spend your savings and how you choose to access your money.

erhaps the most important thing is to work out how much you will need as income, once you have taken into consideration the lifestyle you hope to live and indeed, how long you are likely to live.

So, how long will you live? We all know that generally we’re living longer but what you may not realise is that the older you get, the longer you’re likely to live – this is called the survival bonus. While the average life expectancy of someone who is currently 65 is 84, this increases to 87 if you live to 75 and 91 if you make it to 85. Therefore, your superannuation may have to fund an extra seven years if you remain hale and hearty. If you’re interested in calculating for how long you could possible live, why not try the SHAPE Analyser at MyLongevity.com.au?

What kind of retirement lifestyle do you want to have? While jet setting around the world may appeal to many, the reality is that it costs a considerable amount of money. More realistically, you should consider the following: • where you want to live – will you own your home, have a mortgage or need to pay rent? • what your big expenses will be – will you travel, buy a new car regularly or have to cover high medical and heath costs? • what your everyday expenses will be – do you hope to continue eating out regularly, enjoy going to the theatre or plan to lead a more frugal existence? The cost of living in retirement can come as quite a shock to many people. The Association of Superannuation Funds of Australia (ASFA) issues a Quarterly Retirement Standard that breaks down the budgets required to live a modest or comfortable life in retirement. The latest (June) quarter suggests that, for a single female, the annual amount for a modest lifestyle is $23,767 and $43,062 for a comfortable lifestyle. However, it should be noted that neither of these figures takes into consideration 18

YourLifeChoices Super made easy October 2016

paying off any debt or rent, nor does it allow for money spent on gifts, alcohol or tobacco. When you have a detailed idea of the costs you have to cover, consider the other income that you will receive in retirement: • work – will you continue to earn an income from part-time work, consulting or your own business? • investments – do you have shares, property or business investments that will provide a regular income? • Age Pension – will your income and assets be such that you are eligible to claim a Government support payment? • savings – do you have other money from which you can draw an income or cover larger, one-off expenses? Taking into account how long you are likely to live, what your annual expenditure will be and how much income you can derive from other means, you should be able to calculate how long your super will last based on the income it needs to provide. If you plan on converting your super to an accountbased pension, Moneysmart has a useful calculator that enables you to gauge how long your savings will last.

Age Pension and your super A combination of super and the Age Pension is often how an income in retirement is derived, but how can one affect the other?

t may seem surprising that almost 25 years since it was introduced there would still be debate surrounding the purpose of superannuation. However, it is only following a recommendation from the Financial Services Inquiry in March of this year that the definitive objective of superannuation – “provide income in retirement to substitute or supplement the Age Pension” – is being enshrined in law.

If you have a spouse, their super is assessed under the income and asset tests only once they have reached Age Pension eligibility age or commence the pension phase – where the super fund pays an income stream or pension.

How is Age Pension eligibility assessed?

Also, defined benefit income streams are treated slightly different to the standard income streams. For this type of income stream there is a deductible amount, capped at a maximum of 10 per cent, taken from the gross payment. This remaining amount is then assessed under the income test

Eligibility for the Age Pension is defined by several factors, including age and residential status. However, possibly the most important factors are the income and asset tests that are applied. When you apply for the Age Pension, Centrelink assesses your claim by applying both the income and asset test. You will then be paid under the assessment method that results in the lower payment. For example, if your payment would be $540 per fortnight under the asset test but $536 under the income test, then you will be paid in accordance with the rules that apply to the income test.

So, where does super fit into the calculation? Once you have reached Age Pension eligibility age, your superannuation is assessed under the income and the asset test. The balance of your superannuation fund, or the amount used to purchase an income stream is assessed as a financial asset and deemed to earn income.

However, if you have held your account-based pension and qualified for the Age Pension prior to 1 January 2015, then it will not be subject to deeming.

In order to maximise your income in retirement, it’s important to structure your finances in such a way that you are able to claim at least a part Age Pension. Not only will receiving a part Age Pension mean your super savings last longer, it will also give you access to a Pensioner Concession Card (PCC). Holders of a PCC can access concessions on prescription medicines, rates, car registration, utilities and much more. By using Moneysmart’s Retirement Calculator you can estimate how much income you will receive from your super and the Age Pension once you retire. And if your calculation indicates that you won't receive an Age Pension, it’s worth bearing in mind that you may qualify for a Commonwealth Seniors Health Card – so it’s worth making a claim with Centrelink. YourLifeChoices Super made easy October 2016

Resources Published by: Indigo Arch Pty Ltd Publisher: Kaye Fallick Managing Editor: Debbie McTaggart Designer: Word-of-Mouth Creative Phone: 61 3 9885 4935 Email: admin@yourlifechoices.com.au Web: www.yourlifechoices.com.au All rights reserved, no parts of this book may be printed, reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, recording or otherwise, without the permission in writing from the publisher, with the exception of short extractions for review purposes. IMPORTANT DISCLAIMER No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is distributed on the terms and understanding that (1) the publisher, authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, financial, professional or other advice or services. The publisher and the authors, consultants and editors expressly disclaim all and any liability and responsibility to any person, whether a subscriber or reader of this publication or not, in respect of anything, and of the consequences of anything done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no publisher, author, consultant or editor shall have any responsibility for any act of omission of any author, consultant or editor. Copyright Indigo Arch Pty Ltd 2016 This eGuide has been sponsored by AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788, the Trustee of AustralianSuper ABN 65 714 394 898. The views in the articles are those of YourLifeChoices and not those of AustralianSuper, unless otherwise stated. The articles contain general information and you should consider your personal financial situation before making a decision.

Tax liability How much you contribute and how much you earn, as well as your age, can all have an impact on how your super is taxed. For detailed information, visit ATO.gov.au

Age Pension eligibility By inputting some simple figures, you can calculate if you are likely to receive an Age Pension on top of your super. You can also estimate your likely payment at HumanServices.gov.au

Save a little extra Even a small amount of additional contributions could see your superannuation balance grow over time. AustralianSuper’s Contributions Advisor calculator will give you an indication of how best to do so.

Ready to retire? Not sure if you’re quite at the stage where retirement is the right option? YourLifeChoices has a super simple quiz that will give you an indication of whether you're ready or not and on which areas you need to focus before you make the leap.

Them’s the facts You really can't ever have too much information about super and retirement income so why not take a read through the host of fact sheets offered by AustralianSuper?

Will your money last? That’s the million dollar question and unfortunately one we can’t answer. However, Moneysmart.gov.au has a calculator that will allow you to gauge if and when your savings will run out.

YourLifeChoices Super made easy October 2016