A superannuation guide for Doctors, written by Doctors

Despite being a person who likes to know about everything, I have buried my head in the sand when it comes to superannuation. The very thought of writing this article gave me days of procrastination energy. So after several pleas for assistance from a friend over sixty years of age I dug deep and researched the system.

Understanding superannuation is the first step in planning to retire. The taxation benefits from making contributions will assist in building your retirement funds. I have included the links below for the sites I have read as references.

As always, this is written to stimulate your appetite for knowledge. Check how this applies to your situation by seeking expert advice.

What is superannuation?

Superannuation in Australia is a savings fund accumulated during years of employment. It then contributes towards living costs as a regular income in retirement. There are multiple superannuation funds in Australian and now individuals can ‘self-manage’ or ‘self-invest’ their own superannuation.

Why is superannuation important?

The cost of living in retirement is increasing beyond the government’s capability to provide for the increasing proportion of aged pensioners. The minimum wage was $672.70 per week in 2016, where the aged single pension is only $438.55 per fortnight. This is just $22804.00 per annum compared to $34980.00.

It is almost impossible to live on less than the minimum wage as an aged pensioner even before taking into account the ever-increasing proportion of the population who are retirees. To meet the cost of living, one requires an income of approximately $35,000pa (as per minimum wage) in real terms is required. This does not include increasing health costs for older people such as medication and medical consultations. Nor does it include luxuries such as holidays, gifts or assisting family members in a time of need.

Planning retirement starts with understanding superannuation and the part it will play in providing for your future needs.

The History of Superannuation in Australia

Compared to many countries, superannuation or “pension funds” are relatively young in Australia. In the 1900s many government workers, including politicians, military personal and professional ‘white collar’ workers, received superannuation as part of their salary package.

The ‘Australian Aged Pension’ was introduced in July 1909 which superseded the state pensions that were established in 1900. Prior to this retirees were required to find an income for retirement if they were not privy to a pension fund. After 1950 many changes were introduced by government on aged pensions but the number of participants with superannuation was still well below 50%.

In the 1980s, in recognition of the “baby boomers”, an aging population, reduced birth rate and increased life expectancy, it was predicted that the blowout on aged pensions needed to be stemmed with the introduction of a compulsory superannuation scheme. Hence in 1991 the model of employer compulsory contributions was introduced, substantially increasing the population covered by superannuation. What started as 3% of wages paid by the employer in 1991 is now 9.5% of earnings.

Who contributes to superannuation?

Superannuation Guarantee (SG)

Any person engaged as an employee has compulsory superannuation paid by their employer. This is capped to 9.5% of annual salary up to 203,000, or in effect a maximum contribution of $19304.00 per year (2016).

Your employer must pay 9.5% of your pre-tax salary into your super fund. For Super Guarantee purposes, your pre-tax salary includes:

Your regular wage (ordinary time earnings)
Shift allowances
Commissions
Some bonuses.

Overtime payments however are usually not included.

Pre-Tax Contributions can be made by the employee. These are capped to $30,000 per year for under 50 years of age and $35,000 over 50 years of age. Contributions made up to this limit are taxed at 15% rather than the rate calculated against your taxable earnings (marginal tax rate).

Contribution can also be made to your spouse’s fund if their income is less than $10800. These contributions are taxed at 18% instead of the marginal tax rate.

Government Co-Contribution

If you are an Australian citizen, employed, less than 71 years of age and earn less than $50,454 per year, the government co-contribution can be claimed. The government will contribute up to $500 to your super account (2016) or 50 cents for every $1 you contribute. This requires you to make at least one voluntary contribution to your nominated superannuation account. This is claimed on your annual tax return.

Additional superannuation payments

Individuals can contribute up to $180,000 per year in the 2016/17 financial year. These post-tax contributions are taxed prior to being placed in the fund and therefore are not taxed on withdrawal (meeting the withdrawal age) and earnings on these funds are taxed at 15%.

I am earning good money and have my own investments, so why would I want to contribute to superannuation?

I have raised this question myself, and it is asked by many other health professionals who have investment portfolios, and will hopefully have a successful stream of income in retirement. The answer is: marginal tax plus Medicare levy vs concessional tax.

Earnings derived from superannuation contributions are currently taxed at a lower rate than would be the case for earnings outside a superannuation fund. Super fund earnings are taxed up to 15 per cent, compared to marginal tax rates of up to 47 per cent plus 2% Medicare levy (for 2016/2017 year) on individual earnings outside the super environment. When one considers that the tax rate is 19% above $37,000, the 15% tax rate is attractive.

How much money do I need in my superannuation fund to retire?

The 1993 Fitzgerald report suggested that 18% of earnings would need to be contributed to superannuation to provide sufficient funds for retirement. As employers will be contribute just under 10%, an additional 8% is required to be paid by the account holder from the gross income.

The average Australian wage as of May 2016 was calculated to be $78,832 per year, resulting in an employer contribution of $7489.04. This requires the employee to contribute $22,510 per year towards their retirement fund. This $22,510 will benefit from a concessional tax rate of 15% instead of the person’s marginal tax rate. Tax contributions above the cap ($35k or $30k) will be treated as post-tax contributions and taxed at the marginal rate.

The difficulty with planning retirement and superannuation is that frequently it is a topic that is raised at the age of 50 or 60. This contribution period is significantly lower than at age 30, increasing the annual contributions required to plan for retirement. Contributing from the age of 30 years until the age of 70 years significantly increases the superannuation base for retirement.

The three-fold effect of early contributions are

The money invested grows at the rate of superannuation funds’ performance which on average has been 9% per annum
Protection against significant illness or disability requiring earlier retirement.
Consideration for non-income producing years, such as pregnancy and raising children.

In Summary

The complexities of superannuation have often provided an excellent excuse for avoiding the topic and not preparing well for retirement. Using the basic information above speak with your accountant, tax advisor or superannuation expert to consider options that will better prepare for your future.

[apss_share]