BEGINNERS GUIDE TO SUPERANNUATION

Conditions of release

Types of account

Accumulation account

Defined benefit account

Pension account

Getting money into super - contributions

Having received either concessional or non-concessional contributions, the super fund then combines the contributions held on behalf of all other members of the fund and invests them. These contributions are invested by the super fund for the benefit of the members. The investment returns derived from these contributions are then added to the account of each member and are available as benefits for the member when they become eligible to withdraw their money.

 

In addition to making investments on behalf of members, a super fund can also purchase certain forms of life insurance for its members. Superannuation funds use contributions made on behalf of members to either purchase or provide an insurance policy. Any benefit payments are then paid to the member or the member’s beneficiaries in the event that the insured event occurs.

 

All super funds are managed by one or more ‘trustees.’ As the name suggests, these people manage the money within the super fund ‘on trust’ for the benefit of the members.

 

You may have heard of a form of super fund called a self-managed super fund (SMSF). In an SMSF, the members of the fund are also the trustees of the fund, meaning that the members look after their own retirement money.

 

Conditions of release

 

The overall purpose of a super fund is to accumulate, manage and grow assets on behalf of the member, to eventually provide benefits once the member meets a condition of release.

 

The conditions of release are:

  • The member has reached the age of 65;

  • The member has reached their preservation age and retires;

  • The member has reached their preservation age and begins a transition to retirement income stream;

  • The member ceases an employment arrangement on or after the age of 60;

  • The member has died.

 

Members can also access their super in other special circumstances, including:

  • Termination of gainful employment;

  • Permanent incapacity;

  • Temporary incapacity;

  • Severe financial hardship;

  • Compassionate grounds;

  • Terminal medical condition.

 

The trustee of the super fund must ensure that the member has met a condition of release before any funds can be released to the member. Funds that are released to a member who has not met a condition of release are treated as ordinary income and taxed at the member’s marginal tax rate (i.e the funds are not treated as super benefits). This is particularly important if a member is also a trustee of a self-managed super fund, as there are significant penalties that apply to a trustee that releases funds when a condition of release is not met.

 

Once funds have been contributed to the super fund, they can be freely transferred tax free between complying super funds.

 

Types of accounts

 

Within a superannuation fund, an individual’s benefits are held in their ‘account.’ There are different types of accounts that super benefits can be held in: 

 

Accumulation account

 

This is the most common type of fund which member contributions are made into and earnings are held. Like an ordinary bank account, the member’s benefits will accumulate in the fund. The value of the accumulation account will be equal to the member contributions and earning, minus any fees and tax payable. The investment risk is carried by the member.

 

Defined benefit account

 

A defined benefit account is a super fund which the final benefit that is to be received by the member is defined by the member’s salary at a particular date and a specified amount or conversion factor. The employer’s contributions to these accounts are not allocated to an individual member, rather the funds are pooled from which all the member’s benefits are paid. The investment risk for funding the benefit is carried by the employer sponsor. These type of accounts are being phased out in favour of accumulation style accounts, to pass back the investment risk to the member.

 

Pension account

 

A pension account is a super account that is started from a lump sum transferred generally from an accumulation account. They can only be set up once the member has reached their preservation age. Based on the member’s age, a minimum percentage must be withdrawn every year as a pension payment. The advantage of the pension account is that there is no tax payable on earnings or capital gains on benefits held within this account.

Getting money into super - Contributions
Obtaining life insurance through super

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