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What is the transfer balance cap?

The transfer cap refers to the amount of money that can be transferred from your superannuation account to your tax-free ‘retirement phase’ account.  

At the moment, the transfer balance cap is $1.6 million and all individuals have a personal transfer balance cap of $1.6 million. 

Exceeding the personal transfer balance cap means that you have to:

• Commute the excess from one or more retirement phase income streams. 
• Pay tax on the notional earnings related to that excess

The amount in your retirement phase account may grow over time, due to investment earnings. Although this may grow beyond the personal transfer cap, you will not exceed the cap. However, if you have already used all your personal cap, and then your retirement phase account goes down, you cannot ‘top it up’. 

The rules applied to capped defined benefit income streams are different from other income streams – this is because you can’t usually transfer or commute excess amounts from other streams. 

Choosing investment options in your super

Many Australians ignore the decision of choosing investments for their super and often end up in the ‘default’ option as they make no effort to choose otherwise. 

Default options that aim for ‘balanced’ or ‘growth’ investments tend to have 60-80% of funds invested in shares and property. This approach for investment is based on the best-suited strategy for a large number of members across the years they will be investing. 

However, the default options may not be the best for your financial circumstances and risk profile. Understanding different investment options and how risk assessments work will help you choose better investment options. 

Further, aim to change investment options over time rather than sticking to the same one. For example, you could consider changing options once you begin receiving a pension. 

SMSF Pensions

SMSF funds can provide pension or lump sum benefits during retirement. Retirement is a condition of super release if you have reached your preservation age. Depending on your date of birth, your preservation age will be between 55 and 60. The benefits from your super are tax-free once you are over the age of 60. 

If you plan to start a super pension income stream, then the funds from your accumulation account need to be transferred to your retirement account to fund your pension. Your retirement account has a cap of $1.6 million, so you can transfer that amount as a lump sum but no more. The earnings on these funds are tax-free. 

Each year, you need to withdraw a minimum percentage of your account balance from the retirement fund. This minimum percentage will depend on your age.

Alternatively, you can start your Transition-to-retirement pension if you have reached your preservation age but you are still working. However, unlike the funds that support your super pension once you begin retirement, these are taxed at 15%. 

Calculating how much super you will need when you retire

Calculating how much super you will need will help you decide whether you should be contributing more to your super. You can utilise salary sacrifice schemes to increase contributions, especially if you are not using your entire salary. 

There are two main factors that impact the amount of super you will need when you retire:

Costs in retirement

Consider the major costs that you will need to continue paying during retirement. Examples include:

• Paying off your mortgage
• Rent
• Renovating your income
• Travel
• Medical costs

Estimate how much money you will be needing for each of the aspects that apply to you. Make sure that your estimations are as realistic as possible. Some things, such as medical costs, may be difficult to accurately estimate, so try to keep a higher margin. 

The lifestyle you want

Think about what sort of lifestyle you want once you retire and consider how much money that will require. The Association of Superannuation Funds of Australia provides an estimation of how much money you will need depending on what sort of lifestyle you want:

• Single and modest lifestyle: $27,987 a year
• Single and comfortable lifestyle: $43,901 a year
• Couple and modest lifestyle: $40,440 a year
• Couple and comfortable lifestyle: $ 62,083 a year 

These are estimations and the numbers may be different depending on your circumstances and lifestyle.

Basics of SMSF investing

Setting up an SMSF fund is the simplest step. Establishing a fund which delivers you consistent returns from your investments is much more difficult.

Investing successfully involves determining precise goals and picking investments which will effectively achieve those goals. The advantage of SMSFs is that you can build a portfolio which reflects your short-term and long-term goals in response to changing market conditions.

In an SMSF fund, your investment options are:

• Australian and international shares (listed and unlisted)
• Residential or commercial property
• Cash and term deposits
• Fixed income products
• Physical commodities
• Property
• Collectibles

Before you begin investing, consider what might be the best way to diversify your portfolio. How you portion your investments will depend on your funds, the market, and your goals. Regardless of what your plan is, diversification should be a priority.

Choosing an SMSF as opposed to an industry or retail super fund provides you with more flexibility, but also with more responsibility. Researching before investing is key if you want the best out of your SMSF.

Protecting yourself from super scams

Superannuation is an attractive target for scammers as a significant volume of funds are placed into super funds by Australians.

There are some straightforward steps you can take to protect yourself from super scams.

Know the rules

• Becoming familiar with the rules surrounding superannuation will alert you against scams which make false claims e.g. offering early access to your super
• Keep up to date with the relevant authorities and so that you don’t put in your personal information into the wrong websites – always check that relevant institutions have verified their authenticity!

Check your balance and contact details

• Check what your super balance is on a regular basis – if you notice something that doesn’t quite look right then immediately get into contact with your super fund and ask them about what could have happened.
• Every once in a while, check that your super fund has the right postal address, email address and mobile number – this will help them get in touch with you if they spot any suspicious activity.

Stop identity theft

• Taking the steps to stop identity theft will also help protect your super
• This does not have to be all too complicated e.g. shred important documents, change passwords every few months, etc.

Finding your lost super

Changing of name, address or job can mean that you lose track of some of your super. This means that there is money that belongs to you that is not currently in your super fund. Finding your super will collate your previous lost funds with your current account.

It is likely that your lost super is held by the ATO. Create an account on myGov and link it to the ATO and select ‘Super’.

Once you have done this, you will be able to see the details of all of your past and current super accounts including any lost or forgotten ones. You will also be able to find funds which have been held by the ATO on your behalf. Further, you will be able to consolidate your super funds into a single fund.

Once you have found your lost super, remember to conduct research about which fund is providing you with the best returns before you choose which fund to consolidate with.

Life insurance through your super

Over 70% of Australians have life insurance through their super fund. This acts as a financial safety net through your super if something unexpected happens.

There are 3 main types of life insurance that super funds usually provide:

• Life cover: Also known as death cover, this type of insurance pays a lump sum or income stream to beneficiaries when you die or have a terminal illness.
• TDP (total and permanent disability) insurance: If you become disabled or it is unlikely that you will be able to work again then this insurance will pay you a benefit.
• Income protection insurance: Also known as salary continuance cover, pays a regular income for a specified period (length of time or up to a certain age) if you are unable to work due to temporary disability or illness.

Pros of life insurance through super

• Cheaper premiums: Super fund buys insurance policies in bulk so it is cheaper for their customers
• Easy to pay: Automatically deducted from super’s balance
• Fewer health checks: Super funds accept default level of cover without health checks – particularly useful if you have a high-risk job or health conditions. But, remember that you should check the product disclosure statement (PDS) to see exclusions and treatment of pre-existing conditions.
• Increased cover: You have the flexibility to increase your cover above the default level but you may need to answer some questions about your medical history.
• Tax-effective payments: Employer’s super contributions and salary sacrifice contributions are taxed at 15% which is lower than the marginal tax rate for most people.

Cons of life insurance through super

• Ends at age 65 or 70: While outside of super, your cover will continue as long as you are paying premiums, but TDP and life insurance tend to end at 65 and 70 respectively.
• Limited cover: Since default insurance isn’t specific to your requirements, your cover might be lower than what you would receive outside of your super.
• Cover can end: In some cases, changing your super fund can cause your contributions to stop or your super account to become inactive – this will end your cover and you will end up with no insurance.
• Reduces your super balance: Since premiums are deducted from your super balance, you will have fewer savings for retirement.

Conditions to accessing your super

You may find that accessing your super is the best way to meet your financial needs in a given situation, for example in the early stages of the pandemic. Individuals are able to legally access the funds in their super earlier but there are conditions of release.

Common conditions of lease:

• Reaching your preservation age and retiring (preservation age is between 55 and 60, depending on the individual’s date of birth)
• Reaching preservation age and starting a transition to retirement income stream (TRIS)
• Ceasing employment once you are 60 or over (even if you don’t retire)
• Being 65 or over (even if you don’t retire)
• Death

There are more conditions of release that allow individuals to access their super early:

• Suffering from financial hardship (more resources due to Covid-19)
• Compassionate grounds
• Diagnosed with a terminal medical condition
• Temporarily/Permanently incapacitated
• First Home Super Saver Scheme
• Temporary resident departing Australia
• If you terminate gainful employment with less than $200 in your super account

Self-managed super funds (SMSF) aren’t just about financial investment

Individuals may be looking to opt for an SMSF because these provide entire control over where the money is invested. While this sounds enticing, the downside is that they involve a lot more time and effort as all investment is managed by the members/trustees.

Firstly, SMSFs require a lot of on-going investment of time:

• Aside from the initial set-up, members need to continually research potential investments.
• It is important to create and follow an investment strategy that will help manage the SMSF – but this will need to be updated regularly depending on the performance of the SMSF.
• The accounting, record keeping and arranging of audits throughout the year and every year also need to be conducted up to par.

Data shows that SMSF trustees spend an average of 8 hours per month managing their SMSFs. This adds up to more than 100 hours per year and demonstrates that compared to other superannuation methods, is a lot more time occupying.

Secondly, there are set-up and maintenance costs of SMSFs such as tax advice, financial advice, legal advice and hiring an accredited auditor. These costs are difficult to avoid if you want the best out of your SMSF. A statistical review has shown that on average, the operating cost of an SMSF is $6,152. This data is inclusive of deductible and non-deductible expenses such as auditor fee, management and administration expenses etc., but not inclusive of costs such as investment and insurance expenses.

Thirdly, investing in SMSF requires financial and legal knowledge and skill. Trustees should understand the investment market so that they can build and manage a diversified portfolio. Further, when creating an investment strategy, it is important to assess the risk and plan ahead for retirement, which can be difficult if one is not equipped with the necessary knowledge. In terms of legal knowledge, complying with tax, super and other relevant regulations requires a basic level of understanding at the very least. Finally, insurance for fund members also needs to be organised which can be difficult without additional knowledge.
Although SMSFs have the advantage of autonomy when it comes to investing, this comes at a price. Members/trustees need to invest time and money into managing the fund and on top of this, are required to have some financial and legal knowledge to successfully manage the fund.