BEGINNERS GUIDE TO SUPERANNUATION

A special note about self-employment and super​

What is super?

Super, or superannuation as it is more formally known, is a long term savings arrangement designed to assist individuals to accumulate wealth to enable them to fund their own retirement and therefore reduce their reliance on government services such as the age pension.

 

Versions of super existing in other parts of the world. Australia’s superannuation system as it currently exists took form in 1983, when the then Hawke Labor government reached an ‘Accord’ with trade unions such that the unions agreed to forego direct pay increases in return for the introduction of compulsory super contributions for their members. Initially, employers were obliged to contribute an amount equal to 3% of their employees’ salary or wages into a super fund on that employees’ behalf.

 

The system was expanded in 1992 to cover all Australian employees. This system became known as the ‘Superannuation Guarantee’ and it is still in place today. The introduction of compulsory super came as demographic analysts realised that the Australian population was ageing and this would place a substantial strain on government provided retirement benefits (that is, the old age pension).

 

The changes have had a positive effect – something that is often overlooked as super and its place in public policy is often politicised. But there is evidence to suggest that Australia is comparatively well placed, in world terms, to cope with the ageing of its population (this ageing is also being experienced in other developed economies).

 

Legally, super is a financial product as defined by the Corporations Act of 2001. For most people, it provides one or both of two potential purposes: it is a wealth-creation vehicle and a life-insurance vehicle.

 

The basic idea of a super product is that it is a form of savings to which access is restricted. That is, the money saved into super can only be withdrawn under certain circumstances. By restricting access, the idea is that the assets held within a super fund are more likely to be available for the individual (typically referred to as a member of the fund) when he or she retires. Given that employers must make contributions on employee’s behalf, super is effectively forced saving.

 

A special note about self-employment and super

 

Advisers with self-employed clients should pay particular note of a piece of research produced by the Australian Super Funds Association (‘ASFA’). In 2012, ASFA found that 25% of self-employed people had no super at all. For self-employed people, super is simply too easy to overlook. Superannuation is not compulsory for self-employed people (it is compulsory that they pay it on behalf of their employees), which means that many businesses prefer instead to use all cash generated from their business to meet the expenses of the business and their day-to-day financial needs. Superannuation becomes something they will attend to ‘next year.’

 

Too many small business owners consider the business itself to be ‘our super.’ This is a mistake and can seriously compromise wealth creation and the retirement lifestyle of these business owners.

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