Decode your superannuation with a deep dive inside your nest egg

Aussies now hold more than $3400 billion in superannuation, up 17.5 per cent in just a year. Here’s a guide to what’s inside it.

Superannuation has been compulsory in Australia for almost three decades but still confuses millions of Australians, and causes millions more eyes to glaze over at just the thought of it.

This is sad, because super is their money – just like cash in the bank, an investment property or some company shares. The only difference is it comes with preservation rules that stop people raiding their nest egg before retirement.

And super will grow to become a majority of Australians’ second-biggest asset after their family home. For non-homeowners it could become their largest asset, with men aged 60-64 currently holding around $400,000 on average and women $300,000.

Collectively Aussies hold $3.4 trillion of superannuation, up 17.5 per cent in a year, and it’s projected to grow above $10 trillion in the next 40 years.

Decoding super is simpler than it seems, so let’s take a deep dive inside our nest eggs.

WHY SUPER?

Two key reasons: huge tax savings, and ensuring you don’t retire receiving only an age pension paying about $25,000 a year.

While you’re working and money is being contributed into your super – known as the accumulation phase – earnings and most contributions are taxed at 15 per cent or less, versus up to 47 per cent if that money is held outside super.

It gets even better when you retire and roll your money into an account based pension. Then there’s zero tax on earnings, capital gains and withdrawals, plus it pays you a tax-free income.

Pumping money into super can lower your tax bill, with Aussies allowed to make up to $27,500 of tax-deductible contributions each year (including employer contributions and salary sacrifice).

CHOICE IS YOURS

The vast majority of Australians are allowed to choose their own super fund, yet many don’t bother and have ended up in the default fund their employer pays into.

In the past this has resulted in people paying multiple management fees and insurance premiums to multiple funds because they had changed jobs several times, but on November 1 it changed.

Now people who don’t choose where their super goes will be “stapled” to their existing fund when they switch employers. It will save money on fees, but puts more responsibility on people to make sure they’re not in a poorly-performing fund.

Check how your fund compares with others online. The ATO is rolling out a super comparison tool at yoursuper.gov.au, although this is currently limited to the MySuper default options offered by many funds.

The difference between being in a good or bad fund can be hundreds of thousands of dollars over a working lifetime.

Most Australians can choose how and where their superannuation money is invested.

INVESTMENT OPTIONS

How your super money is invested is important. If you don’t actively choose this, it will most likely be in a balanced mix of assets in your fund’s default option.

This may mean missing out on long-term growth because higher-risk assets such as shares and property have delivered much larger long-term returns than cash or bonds. But a balanced option may still be too risky for someone in their 60s who can’t sleep at night worrying about the next sharemarket downturn.

Most funds offer a mixture of options, and many have advisers who can share information. Here are the key assets held by Aussie super funds and the proportion of people’s money in them.

• Australian shares such as CommBank, BHP, Woolworths and thousands more listed on our local stockmarket – 23 per cent.

• International shares that give you a small stake in global giants such as Apple, Amazon or Tesla and companies from many countries – 27 per cent.

• Property investments such as offices, warehouses and shopping centres in Australia and overseas – 8 per cent.

• Infrastructure assets like airports, gas pipelines and electricity transmission – 6 per cent.

• Cash, the safest investment but one with almost-zero returns right now – 11 per cent.

• Fixed interest including government bonds and corporate bonds, either in Australia or offshore, another low-return conservative investment – 19 per cent.

• Alternatives and other assets such as hedge funds and private equity – 6 per cent.

High-growth super funds can have up to 95 per cent of your money in growth assets such as shares and property, while for conservative funds it can be just 20 per cent, and for balanced funds the mix ranges between 40 and 80 per cent.

Super research group Chant West says for the past decade, high-growth funds returned an average 10.8 per cent a year, balanced funds about 7-9 per cent and conservative funds 5.7 per cent.

FEES

Super fund fees play a huge role in shaping the size of your nest egg.

The average annual fee has come down in the past decade to about 1 per cent of your money invested, yet many people are still paying 2 or 3 per cent.

Check your fees online or in your annual statement, which usually arrives in September or October each year, or call your fund.

Insurance premiums are another super fund fee. Life insurance is vital for people with families and large debts, but for younger people with no dependants or older people with no mortgage and enough wealth elsewhere, paying these premiums may be a waste of money.

However, a majority of Australians are underinsured, so it’s worth reviewing your cover, calling our fund or talking to a financial planner or insurance adviser to work out what you need.

A majority of super funds are heavily invested in sharemarkets in Australia and offshore.

BENEFICIARIES

Who gets your super, and any insurance benefit, when you die is not simply a case of writing their name on a form and sending it to your super fund.

In many cases the super fund trustee has the final say about where the money goes, usually family members or dependants.

You can get full control back by making a binding nomination in writing to your fund, which must be signed and witnessed by two adults who are not beneficiaries. Even then it may lapse after three years, depending on your fund.

It’s wise to think about who would get your nest egg if you weren’t around, and to make sure the superannuation doesn’t spark a legal battle.

Another important issue is that superannuation does not form part of a will. It’s a separate legal structure, but estate planning specialists say super can be dealt with by a will if fund members make their binding nomination to their legal estate.

INCENTIVES TO BOOST YOUR NEST EGG

The federal government offers financial incentives to help you grow your super so you’ll be wealthier at retirement and won’t need as much age pension. These incentives include:

• Tax-deductible contributions up to a $27,500 a year cap, with catch-up contributions allowed since 2019.

• Non-concessional contributions (after-tax money) of up to $110,000 a year, with two future years able to be brought forward.

• Government co-contribution of up to $500 for low and middle income Australians (earning less than $56,112) who put $1000 of after-tax money into their fund.

• Spouse contribution allowing people who put $3000 into the super fund of a low-income spouse (earning less than $40,000 annually) to get a $540 tax rebate.

• People who start a self-managed super fund to hold property or other assets can eliminate capital gains tax if they hold them until retirement.