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Super funds first appeared in Australia in the 1850s as a new way to help workers build wealth for their retirement. Super at the time was only optional and over the next 140 years it became more popular.
In 1992 the government realised that many Australians still weren't saving enough for their retirement, with many people relying on the government pension, which today only pays about $13,000 a year to individuals.
So in 1992 the government passed laws to make super a universal system. All workers would now pay some of their wages into super. Today almost everyone has money saved in a super fund and together Australians have saved over $1 trillion for their retirement.
Very simply, super is a system for saving and investing some of your monthly income at very low tax rates. Income paid into super is generally only taxed at 15%, while income higher than $35,000 paid into your pocket is generally taxed at between 30% and 45%.
The lower rate of tax allows you to save more money and faster.
The super system also has some clever design features to help you save.
First, the system requires you to save 9% of your income every month. This means you never forget to save.
Second, you can't access your savings until retirement (except in special circumstances), so you don't spend your savings before they're needed.
Third, the money you put aside into super is invested by the fund. So not only are you accumulating savings, your money is being put to work to earn more money. Super funds invest in things like companies that pay dividends, or shopping centres and office blocks that earn rent, or infrastructure like roads and airports that earn fees. These investments may grow in value and earn you profits, increasing your savings further.
Fourth, the money your savings earn through these investments is again generally only taxed at 15%, not normal rates of tax.
Every year that your savings are invested and earn money, the profits are put straight back into your account and are reinvested, in turn potentially earning you more profits the next year. This cycle is called 'compounding' and over time it makes your savings grow even faster.
When you reach what is called preservation age (retirement age) you can access your super. You might take it all out and use at your discretion - hopefully to pay for your retirement years - or you might leave some of it in super to potentially continue growing through investments and draw an income from it. The choice is yours, but before deciding you might like to speak to a qualified expert, like an accountant or financial adviser.
In the United States in 2007 at least two events occurred that had an impact on the United States economy. First housing prices started to fall, and second more people started defaulting on their mortgages. The impact of these events was so large that some financial institutions like banks actually failed. Also, the smooth operation of the economy was hit hard. This in turn hurt other economies around the world.
When investors are uncertain or worried about an economy the value of the investments in that economy tend to go down. Due to the scale of the financial crisis, uncertainty has been greater and has lasted longer and so the value of investments everywhere has fallen a long way.
Because your savings are invested their value fell too. In the 2007/08 financial year the value of shares on the Australian share market fell 15.5 per cent and in the 2008/09 financial year it has continued to fall.
Firstly, it is natural to feel concerned. After seeing super grow over many years it is unnerving to see it fall. But it is important to stay calm, not to make any rash decisions, and to understand better how the super cycle works.
Super investments tend to go in cycles. They always fall at some time, but historically they go back up again and usually by more. As the cycle continues - one step back, two steps forward - super slowly continues to grow in value and over many years it can grow by a large amount. That's why super is invested for so long - up to 40 years for most people.
So while your super is going down at the moment, history shows it is likely to go back up again. Most people should have enough time to wait for their super to return to healthy values before they will need to access their savings.
Some people have said that super is a bit like a lottery. But super investments are actually based on very sound and time proven principles to reduce the risks.
- 'Time in the market, not timing the market'. Investments are more likely to grow by being invested over a long time than by trying to pick when to buy or sell. Your fund does not try to pick times to buy and sell, but rather tries to pick healthy investments and to stay invested over a long time.
- 'Start early and invest regularly'. Super funds allow you to invest your savings early on in life and to invest monthly. This means your investments have time to grow through the compounding effect and by investing a little bit every month you also smooth out the market's ups and downs.
- 'Diversification'. Funds spread your investments across different types of investments, in different industries and countries, to avoid 'putting all your eggs in one basket'.
If you are nearing retirement you may be particularly concerned about the recent falls in super. But, once you reach retirement you can actually keep your super invested, while drawing an income to live on. This gives your savings more time to get to the other side of the cycle when they should start to rise again. Someone in retirement can actually keep their money invested for another 20-25 years.
Salary sacrificing means sacrificing an additional part of your salary - on top of the required 9% - into your super. Many people do this to increase their savings.
Salary sacrificing is generally an effective way to save regardless of the economic environment, because of the low tax. Also, as the value of shares goes down you can purchase more shares for the same amount of money. Historically, the value of shares purchased in a market downturn can increase faster in future.
You control where your super fund invests your money by selecting what is called an 'investment option'. Investment options allow you to vary your investment risks and returns. Some investment options include bank deposits that have low rates of return, but are also lower risk, meaning they are less likely to fluctuate or go down significantly. Other investment options, like shares in a company, are higher risk, but can potentially provide you with higher rates of return.
If you are considering shifting into a lower risk investment option, first think about your long-term strategy, your investment timeframe, and the implications of moving your money. Getting advice from a qualified expert is always a good idea.
While the economic crisis has made people pay more attention to their super, it is always a good idea to keep a close tab on your savings. Here is a list of things you should regularly check.
- Regularly check the long-term performance of your chosen fund against other funds. Federal Minister for Super and Corporate Law, Senator Nick Sherry, recommends checking your funds returns performance over a five to seven year period. Super is a long term investment and one-year returns are not a valid measure of your funds performance.
- Fees can make a big difference to your end super benefit, so it's a good idea to check fees and assess whether your fund is competitive.
- Consider consolidating your super accounts. If you hold more than one super fund account, you will be charged multiple fees. If you are unsure of the super accounts you currently have active you could access the Australian Taxation office's 'superseeker' service. Visit www.ato.gov.au/superseeker or phone 13 28 65.
- Make sure your fund has your Tax File Number or there is a risk that all employer contributions, including salary sacrifice, will be levied tax at the highest marginal rate of 45 per cent.
- Investigate if your contribution levels will give you enough in retirement. The Australian Securities & Investments Commission, along with many super funds/providers, offer super calculators on their websites to help people work out if their current super contribution level is enough to help them achieve the lump sum or annual income they desire in retirement.
- Consider some opportunities that may boost your account. This could include salary sacrificing - which may still be an option in low markets, or your eligibility for the Government's co-contribution scheme. You can find out more about the co-contribution scheme by visiting http://www.ato.gov.au/individuals.
A good place to find out more about your super fund, other funds and general information about how super works in Australia, is at the Australian Securities & Investments Commission financial tips and safety checks website, FIDO - http://www.fido.asic.gov.au.
You can also receive a free copy of the booklet 'Super Choices' by calling the Super Choice Infoline on 13 28 64 or visit www.superchoice.gov.au.
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