27th August 2008
It is important that everyone, whether you are in your first job or only a few years from retirement, understands how superannuation works.
What is superannuation?
Superannuation is a mechanism designed to provide benefits (money) for retirement – at its simplest, it is an instrument to save for retirement during a person’s working life. Most people start superannuation when they start work. In Australia employers are required to pay contributions on behalf of their employees. Presently this amount is paid in addition to their base earnings and is currenly a minimum of 9% of the employee's salary. In addition to this compulsory contribution, employees can choose to 'top up' their employer's contribution with their own contributions.
Regular contributions over many years, combined with a sensible investment strategy for the contributions, can mean a person's superannuation can grow into a significant asset over a person's working life, to provide for them in retirement.
Types of Superannuation Plans
In Australia there are two basic types of superannuation plans available - Accumulation Plans and Defined Benefit Plans.
These are the most common type of superannuation plans. With this type of plan the final benefit a person receives, usually when they retire, is the accumulation of contributions and investment earnings less fees, charges, taxes and insurance premiums.
Defined Benefit Plans
With a defined benefit plan the final benefit is determined by set criteria. The criteria usually taken into account are variables such as length of service with the employer, member contributions and salary level on retirement. Defined benefit super funds, as a general rule, are very generous super funds as the value of each member's retirement savings is usually very much more than could be saved in a normal accumulation super fund. Defined benefit plans are becoming less common in Australia, with most employers preferring accumulation plans. The mobility of the Australian workforce also makes defined benefit plans less attractive.
Types of Superannuation Funds
Retail funds are superannuation funds that are available to members of the public. Basically they are regulated superannuation funds that any member of the public can join and are operated by financial institutions.
Industry funds are established for the benefit of employees in a particular industry, e.g. health, hospitality and construction, covered by particular agreements or industry awards and are run on a not-for-profit basis. Industry super funds are funds operated by parties to industrial awards (usually employer associations and/or unions) to provide superannuation for people who work in a common industry or group of associated industries. Industry funds are usually managed by a board of trustees (directors) who are jointly chosen by the employer sponsors and the associated unions as the de facto representatives of the employees themselves.
Employer funds are open to people working for a particular employer. Typically, the costs of operating the fund are covered by the employer. Corporate funds generally are not open to the public. They are superannuation funds set up by the employer and usually have the employer's name in the fund's title. Either a fund manager or trustee may manage these funds.
Public Sector funds
This type of fund is similar to an employer fund except that members are government employees or work for a government-owned enterprise or authority. These funds are run by the government for the benefit of government employees.
Self-managed superannuation funds are also referred to as do-it-yourself (DIY) funds. They are established and manage by individuals themselves. Self-managed super funds can only have a small group of individual members (fewer than five people). Anybody can run an SMSF, but because they can often cost several thousand dollars each year to run, they are mostly suited to people with several hundred thousand dollars in superannuation.
Investment of superannuation
A key to the success of any superannuation arrangement is the investment of the contributions made by both the employer and the employee to the superannuation fund.
Given the time-frame available for an investment in superannuation, investment returns can be enhanced by the powerful effects of compounding investment returns.
We will discuss the investment of superannuation in more detail in next week's Investment News.
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Head of Funds Management
t +61 3 8610 2811
Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.
La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.
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