SUPERANNUATION CONTRIBUTION ANALYSIS ON DEFINED BENEFIT PLAN, TIME VALUE OF MONEY AND TAX ASPECT IN DECISION-MAKING PROCESS
Introduction;
A tertiary employee in Australian market refers to workers who offer services rather than issuance of goods. They have grouped in a sector referred to as a tertiary sector. Just like any other employee they are protected and guided by Australian employment laws as well as respective employers standing orders Nielson(2010, Pg 30). Australian superannuation, on the other hand, is the plan set in place by the Australian government to help people accumulate and consolidate funds/save for a future income upon retirement PSM(2018, Pg. 35). Superannuation has been made a compulsory scheme by the Australian government to an extent of introducing tax benefit on this scheme.
Ideally, we can state that Australian government thinks for better future for its citizens to the point of setting the minimum levels of contribution to be surrendered by employees via employers who are expected to do so by topping it up in their wages and perks. This, therefore, illustrates that apart from the expected portion contributed by an employee the employer is likewise expected to surrender contribution at the rate of 9.5% as at today 2018.The has likewise been attempt to urge employees to sacrifice and do voluntary funds to the contribution scheme apart from the 9.5% rate portion expected.
Schedule 1 of the Superannuation Industry Regulation 1994 likewise describes the procedure to be followed for the redemption of this pension scheme Chromic (2015, Pg. 43). Whereby it outlines that upon attainment of retirement age, irrevocable incapacitation and medical challenges leading to termination one can withdraw funds out of the superannuation account de Zwaan (2015, Pg. 22).
The pension scheme is prone to scandal especially due to conflict of interest among the stakeholders involve thus tasking the persons intending to subscribe for the same to be extra careful when deciding where to have their funds saved for purposes of trust and accountability. Therefore before engaging ones contribution to a fund scheme an employee has to conduct survey and do check and balances for the best option to consider .If an employer has an agreement that is industrial in nature with defined benefit fund authority, the employee is thus not left with the choice of choosing a fund however if not sure on whether you have the option to choose an employee can enquire from her employer as well as the Australian Tax Office for the list of the funds scheme with the forms to be filled.
If there exists no agreement and the employee is mandated to choose where to contribute his fund to he is thus tasked to compare super funds whose fee for registration plus other charges are less, extract whether there is any extra benefit done by employer of an average rate of 9.5% or even a chance for own-self contribution allowed to be made. At investment, point ensures that there is a leeway in selecting the best option that meets employee’s demand and flexibility with less risk.
The choice should likewise be made based on whether there exists an insurance cover to mitigate risk if any and how reliable and effective is the insurance Driver (2018, Pg. 21). Consideration of how long has the fund scheme is in operation or market should also be factored in thus allowing an ideal superfund to be in a stable state for 5years.There should likewise be the consideration on whether there exists a room for the change of superfund as well as the policies and terms for redemption.
Finally, the choice is to be made after enquiring and accessing all relevant information of the super fund scheme in choice so as to create awareness on all aspect relating to the firm from social, financial to the operation stands. This information should be accessed from the website and it gives all the relevant information regarding the fund’s services offered as well as equipping the users of the information on whether it is genuine or not genuine to do business with the super fund entity in choice.
It is now clear that choice of the fund has to be done by either employer or employee but a fund has to be established the failure to which it mandates the employer to contribute and remit contribution to a default fund account that is not defined benefit plan that is limited in nature.
Proper choice of superfund scheme has to be considered extensively through calling the superfunds accounts, researching on their website and finally via information relayed in their disclosure statements brochures so as not to get into a fund that is not promising as well as expensive especially when there exists the need to change Pakpahan(2018, Pg. 285).
However, besides an employee considers all the above options ideally there exist factors that affect the contribution he has now decided to do in the specified superfund account. These factors likewise have to be considered some for compliance purposes others for own awareness. For example, it is practically researched and worked out that in Australia once age weighs and differentiate the levels of contribution, whereby the older persons are seen to contribute more on this fund than the younger generation. This happens simply because the older are likely retiring or are at almost retiring stage hence thinking of income after retirement unlike the younger mind that just specialize in spending.
A contribution made is more likely to be affected by the current rules and regulations of a specific government for example in our case the Australian laws in superannuation fund scheme. The virtue of having this funds being compulsory tasks the employer to contribute the minimum funds for the employee in compliance with the minimum rate of 9% to 9.5% Vidyattama(2013.Pg 730) set by the Australian government. This affects the contribution made because the change in rate ideally depends on the mercies of the government. Risk aversion and taking Ringrose(2018.Pg 34) likewise is an immense factor that is considered by the contributor whereby if he presumes that risk is high Sheedy(2018, Pg 17) he will opt to considers investment plan rather than defined benefit plan and if it is low he will prefer the defined plan.
It will be irrational if we fail to consider the earnings or income attributable to the contributor. This is the backbone of all factors mainly because of you save what you have earned hence if no earnings no saving and vice versa. However we need to factor in the earnings level groups whereby persons with less pay or earning are obliged to others priority tasks that have to be satisfied first hence contributing less or even no contribution at all but those with high level of pay are likely to contribute more to the fund scheme Clare(2012, Pg. 5).
Similar to all the above factors affecting contribution levels there are two other major factors that are based on decision making especially when it comes to contribution. The first factor is the time value of money. Time value of money entails purchasing power of money i.e. can be high or low depending on inflation and deflation factors as well as the change in government interest rates Feng(2014, Pg. 27) as well as other economic changes. This is likewise referred to as depreciation of money. Time value of money ideally has its effect on the type of plan fund chosen. For instance, if one decides to save in a defined benefit plan then he should prepare to forego same value of money he contributed in the long run Australia (2010, Pg. 4). This is so because of the aspect of inflation and interest rate not taken into account Aggarwal (2018.Pg 4). This is so because of the time value of money contributed that devalues as time goes thus leaving the contributor with less money or value whose purchasing power is done.
Time value of money has changed the mind of money contributors who are seen to opt for investment choice plan that has the return on investment hence curbing this aspect of the time value of money. This investment choice plan is seen to consider both economic, political and market factors. It is therefore clear that when making choice of plan time value of money is considered so as not to lose money by saving in a plan that reverses back the value of your money.
The decision on the best plan to choose depends on the time value of money as well as tax aspect. Tax in Australian schemes is regulated by foreign investment fund rule (FIFS) that see into it that all superannuation schemes from 1994 in Australia have its interest exempted for tax purposes. All compulsory schemes in Australia qualify to be classified as foreign investment fund thus clustered under FIFS rule for exemption hence not allowing migration to other state and if so no exemption is allowed thus tasking the interest to be taxed Mackenzie(2017, Pg. 73)
At the point of making decisions on which plan to choose, tax exemption on interest rates has to be considered as per FIFs exemption rule. This rule prescribes the prescribed scheme that is exempted for tax purpose as stipulated by EX 33E of the Income Tax Act 2004.This section outlines that only these listed group of schemes are allowed for tax-exempt; retirement savings accounts approved deposit funds, exempted public/state superannuation schemes and finally regulated superannuation funds.
Although all the schemes that fall in the above list of the chosen plan qualify for tax-exempt on their interest the condition of redemption being at the retirement age prevail unless otherwise. The section likewise has set provisions for transferring benefits in case the employees die and give preservation exempt on the interest redeemable.
Australian Tax Office as an organ of government that compulsorily Gruen(2011, Pg. 44) urge employees to enroll in this superannuation funds is tasked to ensure that all funds that are save in compliance with FIFs Rule should be exempted for tax purposes interest wise as well as taxing all those which are not in that cluster. This includes even barring earlier redemption that does not meet the otherwise options in place whereby this interest are taxed to encourage persons to save until end. It also punishes persons who transfer and shift to investment plans hence are pinned by paying taxes on the interest they earned.
Conclusion;
It is therefore prudent and clears that for persons and employees making decision Hutcheson (2018.Pg 12) on which appropriate superannuation scheme they are to subscribe for has to consider all the above approaches.
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