Superannuation is an option available with an individual to save so that he/she can generate income post retirement from work. SA scheme is linked with one’s employment. Employers have to contribute a % of an employee’s salary into the Superannuation fund. It is also called as “Super”.
Prevalence of Superannuation in India
In India, SA is not compulsory. But it is encouraged for its tax benefits. SA scheme is provided to employees who have completed specified period of service in the company and belong to a particular category.
Employer contributes a percent of basic salary to the SA scheme. Contributions from employer are tax deductible. No contributions from employee. Amounts in SA fund are invested in securities. Employee gets interest on investments.
When an employee retires, 25% of balance can be withdrawn from the fund. This is tax free. Rest of the amount is given to the employee in the form of annuity. The SA benefits are taxed as income in the hands of employees once they retire.
If an employee resigns, SA fund can be transferred to a new employer. If the latter doesn’t have a SA fund, then the employee may withdraw the amount or leave the amount until he attains the age of SA.
Importance of Superannuation
- Increase in number of elderly people
- Increase in life expectancy ratio
- Pressure on Government to take care of elderly is reduced
- Enables an individual to live a life of dignity after retirement
“Insurance with Superannuation”
- SA provides life and disability coverage to members (Group Insurance)
- Automatic insurance cover (premium gets deducted from SA fund)
- Default cover – automatic acceptance level – no health evidence needs to be provided for underwriting
- Tax benefit for premium paid.
- Premium amount is subsidized.
- Insurance cover ceases if contributions to SA fund stop.
Coverage options in Superannuation.
- Death, Total and Permanent Disability, Income Protection.
- Death – Benefits paid as lump sum to nominees
- Total and Permanent Disability – Lump sum paid to individual when he is disabled. Scope of cover depends on insurer.
- Income protection – income provided for certain period if insured cannot pursue any occupation due to temporary disability or illness. This is called as “Salary Continuance”. Minimum duration for which individual must be disabled for claiming the cover is 30 or 60 or 90 days. Benefit paid up to a maximum of 2 years or up to 65 years. The claim is limited to 75% of a person’s gross income.
An individual or legal entity who benefits from a person who provides help is a beneficiary. In a Life insurance policy, on death of the insured, the beneficiary receives the claim amount from insurance company. In binding nomination, member instructs the trustee of the fund about the proportion in which the SA benefits are to be distributed in the event of his/ her death.
Nonbinding beneficiary nomination
Trustee will decide to pay claim to a non-dependent (if employee dies) only if a dependent cannot be found. It is important that SA member should inform the trustee about the nominations.
Encouraging investments in superannuation funds
Start early; contribute regularly; compound earnings. Government co-contributions, allocate pre-tax salary to super. Convert assets to super. Contribution to super is at a concessional rate for those above 50 years of age. Reduced tax liability for investments in SA funds is an advantage.
Two types of superannuation fund.
- Accumulation Fund – This is like a savings bank account. Contributions can be made by employer, member or spouse, Government. Member can select his investment type. But there is investment risk associated with this fund because fund’s earnings depend on market performance.
Retirement Fund = (Accumulated contributions) + Investment earnings – Taxes – Fees paid for fund.
- Defined benefit Fund – Retirement benefit is fixed. A defined benefit is more suitable for employees who have been with the employer for a longer period and the employer is strong enough to guarantee the benefits- this is common for government employees.
Benefits = (Salary) x (Accrual rate) x (Years of service)
Salary = Average salary for the last three years
Accrual rate expressed as a % of salary – it is the amount the benefit increases each year.
SA contributions are deposits made into the SA fund.
Types of contributions
There are two types of contributions: Concessional and Non concessional contributions. Concessional contributions are those where tax deduction can be claimed. Non concessional contributions are contributions to superannuation fund with after-tax money – money one puts in the Super fund on which one has already paid tax and contribution on which there is no income tax deduction. Profits from business or from sale of an asset or inheritance or contribution made by spouse – all these are considered non concessional contributions.
Concessional contributions are those made as per statute or as per legislation or voluntary contributions by employees or contributions made by people who are self-employed.
The Government encourages eligible individuals to save for their retirement and makes matching contribution to members’ contribution till a maximum limit. This contribution depends on income of individual.
Choosing a Super Fund
- Employers choose a ‘default’ fund for employees who do not exercise their choice.
- Identify those employees who have a right to choose their superannuation fund.
- When a new employee joins work, he should be given the SA form within 28 days of a new employee joining work. If employee doesn’t choose within 28 days, the employer will pay superannuation funds into the default fund.
- Employees can make a new choice of fund once a year.
While choosing a fund, ensure that the fund gives good returns and the fund has a good reputation. The charges must be reasonable and death, disability and income protection benefits are provided.
How is SA different from Retirement?
SA means getting released from one’s service after reaching a pre-defined age – example 58 years. Retirement can happen when one attains SA age of 58 years or it can happen through voluntary or compulsory means.
How is SA different from Gratuity?
SA scheme is only for certain categories of employees. As per payment of gratuity act, payment of gratuity is compulsory to any employee who completes 5 years of service in a particular company. DA = Dearness Allowance.
Gratuity = (Basic Pay + DA) x 15 days x No. of years of service