Superannuation is full of technical terminology and jargon.
In this article, we will look at some of the basic superannuation terms and jargon that are being used in superannuation industry and explain what each one means in layman’s terms.
Account based pension
An account based pension (ABP) is a superannuation product that gives you regular payments when you retire. The terms Account based pension, Allocated pension, Income stream or simply pension (but it is not the government age pension) are used interchangeably in superannuation industry.
There are generally two ways you can receive your superannuation benefit when you retire – as a one-off lump sum payment or in the form of an account based pension or both. You generally set up an ABP with superannuation money that you’ve accumulated during your working life. If you don’t have money in superannuation you can still set up an ABP by making contribution to superannuation fund and then convert it to ABP. To do this you must be eligible to make a contribution i.e. you need to meet the work test and you must meet a condition of release to be able to convert your super to income stream.
You can specify the amount and frequency of payment you want to receive as long as it is above the minimum amount required to be taken each year, depending on your age. There is no maximum limit. You’ll continue to receive regular payments until your account runs out of money.
See account based pension.
When a member of a superannuation fund dies, the total account balance is generally paid to his/ her beneficiary. In addition, the superannuation fund also has the option of paying an anti-detriment benefit which consists of the total contributions tax paid by the member. It is basically a refund of contributions tax paid to the ATO by the member. Superannuation funds are not required to pay the anti-detriment benefit but if they do choose to, they can claim it back from the ATO.
Condition of release
A condition of release is an event that you need to satisfy or must have occurred relevant to your situation before you can access your superannuation. For example, when you reach your preservation age and retire from the workforce, you’ll be able to access your super. Refer to the article entitled “Conditions of release: when can you access your superannuation?” for a list of all conditions of release.
Contribution is a payment made to a superannuation fund in order to increase retirement savings. Another way to put the money into your super account is by way of a rollover.
A contributions cap is the maximum amount of contribution a person can put into superannuation each year without having to pay additional contributions tax. A rollover of benefit from one super fund to another is not classed as a contribution. There are two types of contributions caps – Concessional and Non-concessional contributions caps. If you breach the caps, you’ll have to pay additional tax called excess contributions tax.
Concessional contribution is a taxable contribution, e.g. employer contributions (including SG), salary sacrifice or a personal contribution that you’ve claimed as a tax deduction are all concessional contributions. These contributions are subject to 15% tax because a tax deduction has been claimed by the employer or the individual who made the personal contribution.
Contribution splitting is a process of transferring contributions received in a financial year to the member’s spouse account. The maximum amount can be transferred each year is only 85% of the contribution received as 15% is paid to the ATO as a contributions tax. The reason you would want to split contribution is that if you want to increase your spouse’s account balance or if you want to access superannuation early, you split the contribution into the older spouse. This is not a Family Law payment split.
Contributions tax is a tax levied by the ATO on concessional contributions at a flat rate of 15%.
Choice of fund
Since July 2005, most workers have been able to choose their own superannuation fund when they start a new job. You don’t have to go with your employer’s fund like the old days. This means whenever you change job, you don’t have to change a super fund; you just tell your new employer to end your SG contributions o your choice of fund. When you start a new job, your employer must give you the ATO’s Choice of fund form to complete and tell them where you want your SG to go. It is not compulsory to choose your own fund, but if you don’t, your employer will pay your superannuation to their own default fund.
Employers have to nominate their own super fund for their employees and this fund is called the employer default fund. If you don’t choose your own fund, your employer will pay SG to their default fund. The benefit of going with the employer’s default fund is that you’ll receive an automatic age based insurance cover without applying for it.
The employer’s default fund must offer a minimum level of insurance cover (Death & TPD) to any employees who do not choose their own fund. The amount of cover depends on your age – the younger you’re the higher the sum insured which decreases each year as get you get older. The default insurance is automatically activated for you by the super fund when they receive your SG contributions from your employer. If you don’t want this insurance, you can opt-out by advising the fund.
An investment switch or simply a switch is a process of changing an investment portfolio or option. Some examples of investment options are share, property, fix interest, balanced, diversified, high growth etc. When you join a super fund, you’ll be asked to choose an investment option(s). If you don’t choose one, your super fund will invest your money in their default option. You can, however, switch to a different option(s) at anytime by completing a switch request form or you can switch online.
See Account based pension
The member protection rule was introduced to protect low superannuation with low account balances from being eroded from fees and charges. The rule prohibits superannuation funds from charging the annual administration fee more than the annual investment earnings when the account balance falls below than $1,000. For example, if a member with an account balance of $990 earns $50 interest and but the administration fee is $60, the super fund can only charge $50. Member protection only applies to accounts with employer contributions. A new legislation has been proposed by the government to abolish member protection.
See Non-concessional contribution.
Nomination of beneficiary
As a member you can nominate a beneficiary or beneficiaries to receive your superannuation benefit in the event of your death. The beneficiary you nominate must be your dependant within the definition of Superannuation Industry (Supervision) Act otherwise, your nomination is invalid. Your dependants include your spouse, your children, any persons financially dependent on you, anyone with whom you have an interdependency relation with you and your legal personal representative. There are four types of nominations and each one is discussed further below.
You can make a non-binding nomination to let your super fund know who you’d like to receive your benefit in the event of your death. When your super fund makes a determination as to whom is entitled to receive your benefit, they will take your wishes into consideration. However, they still have the discretion to pay the benefit to whoever they think is most eligible and entitled to receive. Your super fund is not bound to follow your instructions. The non-binding nomination does not expire and it will remain in-force until you cancel it or make another nomination to override it.
When you make a valid binding nomination, your super fund will pay the benefit to the beneficiaries you nominated. Unlike the non-binding nomination, they cannot use their discretion to pay the benefit to anyone else. The Trustee of your fund must pay the benefit in accordance with your wishes. The binding nomination expires every three years which means you have to make a new nomination every three years to renew it.
This is the same as binding nomination except that it does not expire. It will continue to be in-force unless you make another nomination to override it.
This is a personal contribution that you make to your superannuation fund from your own after-tax money, i.e. the money you have already paid income tax on it. This is also known as an undeducted or member contribution or simply personal contribution.
You can only make a reversionary nomination on an income stream (allocated pension) account. It is not available on a superannuation account (accumulation phase). The only person you can nominate as a reversionary beneficiary is your spouse. Basically, if you die, your pension payments will continue and be paid to your spouse.
Rollover is a process of transferring a superannuation account balance from one super fund to another. Rollover is not a contribution. To rollover your super benefit to another fund, you simply need to complete your new super fund’s transfer form and send it to your new fund or complete your existing super fund’s application for payment form and send to your existing fund. Alternatively, complete the ATO’s generic transfer form and send it to your existing fund. You also need to provide a certified proof of identity document in the form of either a Driver’s licence or passport.
As the name implies, you sacrifice part of your salary before income tax has been deducted and put it into a superannuation fund instead. The benefit of doing this is that salary sacrifice to superannuation is only taxed at 15% whereas if you take it as income, you can potentially be taxed up to 46.5% depending on how much you earn.
As part of the governments’ incentives to encourage people to save for their retirement, you can make a contribution on behalf of your spouse. The benefit of doing this is that you receive a tax benefit in return. If your spouse is eligible and you make $3,000 spouse contribution, you’ll be eligible to claim up to 18% of the contribution as a tax offset giving a maximum of $540 tax rebate.
Transition to retirement allocated pension (TRAP)
TRAP is another type of account based pension or allocated pension or income stream but with a restriction. Just like ABP, you can only set up a TRAP using superannuation monies.
Whilst, you have to meet a condition of release (eg retirement) to set up an ABP, you only need to reach your preservation age to set up a TRAP. The restriction is that you can only withdraw a maximum of 10% of your account balance each year. The government’s initial idea when designing this product was to help people eased into retirement. Instead of fully retiring, people can just continue working part time and supplement their income by accessing their superannuation via TRAP. However, these days TRAP is a very popular strategy used to minimise tax especially for those in the higher tax brackets. E.g. a person can salary sacrifice (up to $25,000 incl. SG) to super and be taxed at only 15% rather than at their marginal tax rate. By doing this, they’ll receive less income but they can supplement their income with TRAP.
If you’re aged between 65 and 75 you cannot contribute to a superannuation fund unless you work for at least 40 hours in a period not more than 30 consecutive days in a financial year. This is called the work test. You cannot make a personal contribution once you’re over 75.