Glossary


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A

Accumulation fund

A superannuation fund to which you and your employer make regular contributions which accumulate and, when invested, generate earnings. The super benefit you receive is the total of all the contributions into your account, plus investment earnings (which can be either positive or negative), minus expenses and taxes.

Accumulation funds are also known as defined contribution funds, as the contributions from your employer are generally specifically defined (ie 9.5% of salary per annum).

Accumulation style super

Accumulation style benefits are made up of:

  • contributions made by you and your employer
  • PLUS transfers to your account from other super funds
  • PLUS investment earnings on your money (which can be negative)
  • LESS taxes, surcharges, fees, expenses, insurance premiums and amounts paid to or for you
Active investment approach

An investment approach where the fund manager aims to perform better than the overall market and will actively buy and sell underlying investments to increase the fund's performance.

Activity fees

This is a fee a member will incur directly for a requested service, such as a partial withdrawal to another fund or Family Law requests. An activity fee will only be charged when an additional service is requested by the member.

Administration fee

The fee charged by a fund to cover administration costs.

Aggressive portfolio

A portfolio which is designed to provide above-average returns by taking above-average risks. Typically an aggressive portfolio will have a relatively high exposure to equity (shares) investments.

All Ordinaries index

The All Ordinaries index tracks the price of share movements in the major listed companies on the Australian Stock Exchange (top 500 companies).

Each company is weighted according to the total market value of its shares. The index is comprised of a number of sub-indices including the All Resources, All Industrials, the 50 Leaders and a number of sector indices such as mining, media and transport.

Alternative investments

The term 'alternative investments' can be applied to a vast array of investment strategies, ranging from hedge funds through to currency strategies, infrastructure, private equity, commodities, collateralised debt obligations and various structured products.

Generally speaking, the term applies to an investment strategy whose return is not driven by traditional market exposure to shares, fixed interest, property or cash.

Some alternative assets may be considered to have more growth than defensive characteristics, and vice-versa. This means that a particular alternative asset may be classified as either 'growth' or 'defensive.'

Annuity or immediate annuity

An arrangement whereby an individual invests a lump sum amount in order to obtain a series of periodic payments; usually purchased in order to fund a retirement income.

Each time a payment is made, the annuitant is getting back part of the money initially outlaid, plus interest. The amount of income is determined at commencement and is calculated based on the terms and conditions chosen and the rates of return offered by the provider. Some providers limit the ability to commute annuity to a lump sum once they have commenced.

Approved Deposit Fund (ADF)

Approved deposit funds were introduced in 1984 as an 'approved' fund for receipt of superannuation lump sums (ie rollovers). Due to subsequent legislation changes, superannuation funds can offer the same facilities so ADF's have become less relevant.

ASIC

ASIC stands for Australian Securities & Investments Commission, an independent government body responsible for regulating and enforcing corporate and financial services laws designed to protect consumers, investors and creditors.

For more information on ASIC, visit their website at asic.gov.au.

Asset allocation

The ratio of different types of asset classes within an investment portfolio. For example, cash, shares, property.

Asset classes

Major groupings into which managers can invest funds held by them. The groupings can be sectorial or regional. Asset classes generally have their own indices. When dealing with composite investments, asset classes are generally higher level than when dealing with sector specific investments. For example, composite investments may regard Australian shares as an asset class while a share based investment may regard industrial shares or even say transport sector shares as an asset class.

Major asset classes for growth investments include shares, property and alternative assets.

Major asset classes for defensive investments include fixed interest, cash and alternative assets.

Assets and income tests

Two tests which may be applied to assess your eligibility for a Government pension, benefit or allowance.

ASX

Short for the 'Australian Stock Exchange', the ASX is Australia's main market for trading shares, derivatives and fixed interest securities.

ATO

The Australian Taxation Office. Visit the ATO website at ato.gov.au.

Australian Prudential Regulation Authority (APRA)

The government body responsible for the regulation of the Australian financial services industry. For more information, visit APRA's web site at apra.gov.au.

Average Weekly Ordinary Time Earnings (AWOTE)

A measure of wage and salary levels of employees in Australia, as measured by the Australian Bureau of Statistics and published monthly. The change in AWOTE is often used as an index for annually increasing certain thresholds.

Award

An award is a legally enforceable order setting out the minimum terms and conditions of employment for a group of employees.

There are two main types of award:

  • Federal awards: may apply in more than one State
  • State awards: generally apply to an industry or occupation.

Federal awards take precedence over State awards where there are any inconsistencies.

Award superannuation

Where a member's superannuation entitlement is set by a Federal or State industrial award or certified agreement. Sometimes these entitlements differ from entitlements members have under the minimum requirements set by the Superannuation Guarantee (SG).

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B

Balanced fund

A fund that seeks both growth and income, with stability of principal, through a portfolio that includes both stocks and bonds.

Basis point

A basis point (or 'bp') is 1/100th of a percent (ie 20 basis points is equal to 0.2%). Basis points are usually used to describe movements in interest rates.

Bear market

Where stock prices fall and experts believe they will continue to decline for a period. Opposite of a bull market.

Benchmark

The benchmark is the long-term mix of investments. Over shorter periods the actual mix may vary from this benchmark but will stay within the allocation ranges.

Beneficiary

A person for whom assets are being held in trust. In a super fund the beneficiary is the person(s) or entity designated by the member to receive his/her death benefit.

Benefit

The amount of money in the super fund to which the member is entitled.

Benefit accrual rate

A rate, usually shown as a percentage, used to calculate a member's benefit under a defined benefit superannuation arrangement.

Binding death benefit nomination

An instruction that you give the trustee of your superannuation fund concerning the payment of a death benefit. Unless a binding nomination is in force, the trustee has discretion in determining to whom a death benefit should be paid - generally it must be paid to a dependent or your legal personal representative. The nomination must be renewed every three years (earlier if the fund's rules require) and must be signed in front of two adult witnesses (who cannot be the nominated beneficiaries).

Blue-chip

A high-quality, relatively low-risk investment. The term usually refers to stocks of large, well-established companies that have performed well over a long period.

Bond

Bonds can be issued by governments, government agencies and corporations. When an individual invests in a bond, they are effectively lending money to the issuer of the bond. The issuer will pay interest to the investor at a fixed rate until a specific date, at which time the investor will receive their original sum of money back.

Bottom-up approach

An investment strategy that emphasises finding outstanding individual companies before considering broad economic trends.

Brokerage

A fee paid to a stockbroking firm to buy and sell shares on your behalf.

Bull market

A prolonged period of rising security prices. Opposite of a bear market.

Buy/sell spread

The difference between the entry price and exit price of units. This difference represents an allowance for costs, expenses, commissions, brokerage and other fees which would be incurred in buying and selling part or all of the underlying investments of each investment option, and is commonly referred to as the buy/sell spread or buy/sell margin.

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C

Capital gain/loss

Generally, the difference between the purchase price and the sale price of an asset.

Capital gains tax

A tax on the profit obtained when an asset is disposed of. Generally applies to assets acquired after 19 September 1985 and most main residences and motor vehicles are exempt from this.

Capital growth

Appreciation in the capital or market value of an investment, as opposed to income which may be received from the investment from time to time. For example, dividends in the case of share investments.

Cash investments

Cash includes short-term interest bearing investments. Generally, the likelihood of losing the initial investment in cash is minimal. While volatility with cash is low, the returns are also likely to be lower than those available from fixed interest, property and shares over the long term.

Child

The definition of child from 1 July 2008 includes:

  • an adopted child, a stepchild or an ex-nuptial child of the person;
  • a child of the person's spouse; This includes the child of a spouse (whether they are spouses because they are married, de-facto, in a registered relationship or a same-sex de-facto relationship). The child does not need to be the issue of both members of the couple;
  • someone who is a child of the person within the meaning of the Family Law Act 1975.
Choice of fund

From 1 July 2005 most Australians have had choice over which complying superannuation fund their Superannuation Guarantee contributions are paid into. The goal of 'choice of fund' is to give employees greater control and ownership of their super.

Co-contribution

The Government Super Co-contribution is a contribution by the Government to match personal after-tax contributions paid to a superannuation fund. It applies in respect of contributions made from 1 July 2003 onwards. There are eligibility requirements and certain restrictions apply. To find out more visit our co-contribution page.

Commutation

The exchange of part or all of a regular income stream for a lump sum.

Complying superannuation fund

A superannuation fund that complies with the operating standards specified in the Superannuation Industry (Supervision) Act 1993 and is thereby eligible to receive concessional taxation treatment.
Compound interest

Compound returns

Compound returns are calculated as the average of annual returns. For example, if returns are 5%, 6% and 7% over three consecutive years, the compound return is 6% per annum, as the same result could be achieved by earning a return of 6% in each of the three years.

Concessional contributions

Generally, a concessional contribution is a contribution that is made by or for you to a complying super fund and that is assessable income of the fund.

Concessional contributions include:

  • employer contributions (including Superannuation Guarantee (SG) contributions at the rate of 9.5% from 1 July 2014, and salary sacrifice);
  • notional taxed contributions for defined benefit members;
  • personal contributions which are claimed as a tax deduction (self-employed and retirees under age 65);
  • amounts transferred from a foreign super fund that exceeds the member's vested benefit
  • certain allocations from reserves.

Concessional contributions do not include:

  • roll over super benefits from other funds;
  • the taxable amount of a super benefit transferred from a foreign super fund where the member has elected to transfer the tax liability to the fund;
  • contributions to a constitutionally protected super fund.
Concessional contributions cap

Concessional contributions made to super are subject to annual contribution caps, set by the Government.

The caps for the financial year to 30 June 2017 are:

  • $30,000, if aged 48 and under on 30 June 2016, or
  • $35,000** if you were aged 49 and above on 30 June 2016

**Contributions in excess of these caps will be added to your assessable income for the relevant tax year and taxed at your marginal rate. You can elect to have the excess refunded. If you do not elect to take the refund offer, the excess contributions will also count towards your non-concessional contributions cap.

Conditions of release

The general term used to describe the triggers which allow you to gain access to your preserved superannuation savings. Some conditions of release are:

  • Retirement (after reaching preservation age)
  • Ceasing an employment relationship after age 60
  • Attaining age 65
  • Permanent incapacity
  • Severe Financial Hardship
  • Compassionate Grounds
Conservative

A cautious approach to investing that takes only prudent risks to seek a reasonable return.

Consumer Price Index (CPI)

Used to measure the rate of increase in inflation. In Australia, CPI is based on a selection of household goods and services.

Contribution

A contribution is a payment made to your superannuation fund. Your employer is required to make contributions to your super fund under the Superannuation Guarantee Act or under an Award arrangement. You may also be able to make contributions to your super fund, usually from both pre-tax and/or post-tax earnings.

Contributions tax

A tax that applies to concessional contributions. The contributions tax rate is 15%.

Credit risk

The risk that a debt issuer will default on payment of interest or principal.

Currency hedging

Hedging refers to the process of protecting investments against, or reducing the risk of, a loss. A common type of hedging is currency hedging. The value of overseas investments is affected by rises or falls in the value of the Australian dollar. For example, if the Australian dollar rises in value, then overseas investments will reduce in value. Investment managers can use various techniques to minimise the effect of currency movements on overseas investments - this is currency hedging.

Currency risk

The risk that funds invested overseas gain or lose value as a result of a falling or rising Australian dollar.

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D

Deduction (tax)

An amount applied to reduce a taxpayer's assessable income.

Deeming

A process where Centrelink 'deems' you to have received a certain income on financial assets regardless of the actual income and capital growth you receive. Two different deeming rates apply - a lower rate up to a limit (which is different for couples and singles) and a higher rate thereafter.

Defensive investments

Investments used when trying to protect the investment from the chance of a negative return. Defensive assets tend to produce lower long term but more stable returns than growth investments.

Defensive investments include fixed interest and cash.

Defined benefit fund

A superannuation fund where the benefits to be paid to the member are defined in advance of the member's retirement. The benefit is usually expressed as a proportion (for example 75%) of the member's salary on retirement. In this type of fund it is generally the company or sponsor of the fund (rather than the member) which carries the risk as to the ability of the fund to meet its liabilities. Opposite of defined contribution fund, or accumulation fund.

Defined benefit style super

You are a defined benefit member if your benefit on leaving service (either now or in the future) is worked out using a formula. The formula is normally based on your salary or earnings over recent years and your years of defined benefit membership.

Defined contribution fund

An alternative to a defined benefit fund and operates somewhat like a bank account. Members who belong to this type of fund receive the total of all employer and employee contributions plus the investment earnings (interest) on these contributions less any taxes and other expenses. Also known as an accumulation fund.

Departing Australia superannuation payment

Eligible temporary residents who work in Australia, and have superannuation contributions paid by their employer, are entitled to receive their superannuation benefits once they leave Australia. This payment is called the departing Australia superannuation payment (DASP).

Dependent

A superannuation death benefit may be paid to a dependent of a deceased member as a lump sum, pension or a combination of the two. Pensions paid to children of the member are subject to some restrictions.

A dependent for superannuation purposes includes:

  • The spouse of the deceased member. This definition includes any two people living together on a genuine domestic basis as a couple.
  • A child of the deceased member
  • Any other person with whom the deceased member had an interdependency relationship
  • Any other person who was a dependent of the deceased member just before death
Derivatives

Investment products whose value is derived from other investments, eg futures or options.

Distribution

Payment of a dividend or capital gain. Shareholders may take their distributions in cash or reinvest them in additional shares of the same fund or another fund.

Diversification

Spreading investments among many different assets, asset classes, investment managers or countries to reduce the risk of owning any single investment.

If one asset is performing poorly, another may perform well and make up for the loss.

Dividend

A payment of cash from a company's profits to its shareholders in proportion to the number of shares the shareholder owns.

Dividend imputation

A method which removes double taxation on company profits paid as dividends (ie income tax paid by the company on their gross profit and then income tax paid by the shareholder on the dividend resulting from the company's profit).

The dividend paid from a company's taxed profits (known as a 'franked dividend') includes an imputation credit, which represents the amount of tax already paid by the company. When the shareholder includes the dividend in his/her assessable income, a reduction in tax is available to the shareholder equal to the imputation credit.

Division 293 tax

This is an extra tax amount that applies to the concessional contributions of high income earners. It functions slightly differently depending on whether you earn over $300,000pa outright, or slightly below that figure:

If you earn an income of more than $300,000 a year:

  • You may need to pay a further 15% on some or all of your employer contributions, salary sacrifice contributions and other taxable contributions.
  • Income for this purpose generally includes your normal taxable income, plus your reportable fringe benefits, net investment losses and your concessional superannuation contributions.

If your income is less than $300,000:

  • The additional tax will apply only to those contributions which take your income over $300,000.
  • For example, if you earn $280,000 and you contribute $30,000 after tax, the additional tax will only apply to $10,000.
 

This additional tax does not apply to any excess concessional contributions.

Dollar-cost averaging

An investment strategy based on making investments of equal amounts at regular intervals in the same fund or security. Because the shareholder buys more shares at lower prices and fewer shares at higher prices, the average cost of the shares purchased will generally be lower than the average price over the investment period. However, dollar-cost averaging does not ensure a profit or protect against a loss in a declining market.

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E

Early retirement

Retiring before the normal retirement age. The normal retirement age is the age at which a defined benefit fund pays the retirement benefit. In most cases, this will be age 65, however some professions and industries have a lower normal retirement age due to greater requirement for mental and physical fitness (eg airplane pilots).

Eligible rollover fund (ERF)

A superannuation fund eligible to receive benefits automatically rolled over from other superannuation funds. ERFs are designed for accepting unclaimed benefits (for members under age 65) from other superannuation funds.

Eligible Termination Payment (ETP)

A lump sum payment from a superannuation fund, rollover fund or Retirement Savings Account. Can also be a lump sum payment from an employer when an employee ceases employment. Components of an ETP are taxed differently.

Employment termination payment

A payment that is received in consequence of the termination of employment, other than a payment from a superannuation fund.

Enduring power of attorney

A 'power of attorney' is a written document that allows you to authorise an individual or group of individuals to make financial decisions on your behalf if, for example, you are out of the country.

An 'enduring' power of attorney allows you to give someone control over your finances if you are incapacitated through injury or illness and no longer competent.

Entry and exit price

The entry and exit price of a unit basically reflects the net asset value of the investment option divided by the number of units on issue at the relevant time. This may be adjusted to reflect any buy/sell spread applying to the investment option.

Equities

In sharemarket terms, equities are another name for shares. Equities/shares represent part-ownership in a company of which you've bought shares.

Estate planning

The overall process of working out beforehand how your assets are to be distributed on your death.

Ex-gratia payment

A lump sum payment from an employer which is generally not part of an employee's normal wages or salary (ie a reward on retirement for loyal service).

Excess concessional contributions

Concessional contributions in excess of the concessional contributions cap.

Excess concessional contributions tax

The ATO will identify if a person has exceeded their concessional contributions cap. Where excess contributions are identified, the excess will be added to the individual's assessable income for that tax year and they will be sent an assessment for additional tax. This tax is effectively paid at their marginal tax rate.

The individual can pay this tax themselves or have funds released from super to pay it. Any remaining excess contribution (up to the amount of the excess, less applicable tax) can also be refunded. If the refund offe r is not chosen, any excess contributions remaining in the fund will also count towards the non-concessional cap for that year.

Excess non concessional contributions

Non-concessional contributions in excess of the non-concessional contributions cap.

Excess non concessional contributions tax

A tax of 49% that applies to non-concessional contributions in excess of the relevant cap. The ATO will assess whether a person has exceeded the relevant cap. The individual will be personally assessed for this tax and will be required to nominate a super fund to release monies to pay the liability. The amount of any excess non-concessional contributions can remain in the fund.

However, the individual is now allowed to elect to refund excess non-concessional contributions to avoid this penalty tax. If the refund offer is accepted, excess contributions will be returned, along with an estimate of "associated earnings" on the excess contribution. Any such earnings will be added to the individual's assessable income for the relevant year and effectively taxed at their marginal rate.

Exempt income

Income that is exempt from taxation.

Exit fee

A fee that a fund may charge when you make a full or partial withdrawal of your super.

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F

Financial hardship

Super is generally preserved in a super fund until an individual retires permanently from the workforce on or after their preservation age. However, super fund trustees may allow the early release of preserved super benefits under certain circumstances, e.g. if the individual is suffering severe financial hardship or on specified compassionate grounds.

To apply for financial hardship you must apply to the trustee of your super fund, as special conditions must be met.

Fixed interest investments

Issued to investors by Australian and overseas governments, semi-government authorities and companies in return for cash. Interest is paid to the investors over the life of the investment, usually at a fixed rate. These investments can generally be bought or sold before they mature, potentially resulting in capital gains or losses.

Bonds, bank bills and debentures are examples of fixed interest investments.

Overseas fixed interest investments are normally hedged to remove the effect of currency movements.

Fixed interest investments are less volatile than shares or property but with a lower expected return in the long term.

Fixed-income security

A security that pays an unchanging rate of interest or dividends. Fixed-income securities include bonds, money market instruments, and preferred stock.

Franked dividends

Distributions received from Australian companies on which the full rate of company tax has been paid. Dividends carry a tax credit.

Fringe benefits

Benefits received by an employee that are not in the form of salary or wages (for example, health, life and other types of insurance, company accommodation, use of company vehicle, personal computer).

Fringe benefits tax

A tax payable on a non-salary benefit (ie a 'fringe benefit') provided to an employee in place of salary or wages. Employers are required to record the taxable value of certain fringe benefits provided to employees. Where the total taxable value of those fringe benefits exceeds $2,000 in a fringe benefits tax (FBT) year (1 April to 31 March), employers are required to report an amount on the employee's payment summary.

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G

Gainfully employed

Means employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.

Golden handshake

This is a lump sum payment made by an employer on termination of employment. It is paid in recognition of services rendered by an employee, sometimes specified in a contract.

Government Super Co-contribution

A contribution by the Government to match personal after-tax contributions paid to a superannuation fund. It applies in respect of contributions made from 1 July 2003 onwards. To be eligible, certain restrictions apply. To find out more visit our co-contribution page.

Gross

The whole of an amount before any taxes or fees are deducted.

Growth investments

Historically, growth investments have tended to give higher returns over the long term but experience more volatility (ups and downs or 'risk') in the short term.

Growth investments include shares and property.

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H

Hedging

Hedging refers to the process of protecting investments against, or reducing the risk of, a loss. A common type of hedging is currency hedging. The value of overseas investments is affected by rises or falls in the value of the Australian dollar. For example, if the Australian dollar rises in value, then overseas investments will reduce in value. Investment managers can use various techniques to minimise the effect of currency movements on overseas investments - this is currency hedging.

Historical yield

The actual yield of an investment over a given period, measured from the beginning of the period.

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I

Indirect Cost Ratio (the cost to manage your investment)

This is the cost to manage your investments. It includes investment management, custodian and asset consultant fees. Fees paid to investment managers may also include performance fees when their investment returns exceed agreed performance benchmarks. Fees are calculated looking back as at 30 June each year (using the average value of all the assets in the investment option over the year to 30 June). These may change from year to year.

Income portfolio

A portfolio consisting of securities whose principal attractiveness lies in the steady income they provide.

Income splitting

Term used to describe the practice of dividing a flow of income between two or more people, usually the partners of a couple.

Index

A benchmark against which to measure performance, such as ASX300 Index (previously 'all ordinaries index').

Indexed investment approach

Managers of investment options with an indexed approach (sometimes called a passive approach) aim to perform in line with the overall market.

Individual asset risk

The risk attributable to individual assets within a particular asset class.

Inflation

A rise in the prices of goods and services, often equated with loss of purchasing power.

Inflation risk

The risk that money invested may not maintain its purchasing power due to increases in the price of goods and services (inflation).

Interdependency relationship

Generally, two persons can be considered to have an interdependency relationship if:

  • They have a close personal relationship, and
  • They live together, and
  • One or each of them provides the other with financial support, and
  • One or each of them provides the other with domestic support and personal care.
Invalidity component

The future service component of an eligible termination payment (ETP) paid as a result of permanent incapacity.

Applies from 1 July 1994. The invalidity component represents a payment for the period between the date the employment stopped due to invalidity and the date of normal retirement. This component is generally tax exempt.

Invalidity payment

A payment in respect of permanent incapacity. The payment is made either by a superannuation fund or directly from an employer.

Invalidity segment

Generally, an employment termination payment will include an invalidity segment if the payment is made as a consequence of the person ceasing employment due to invalidity (as defined in legislation). The invalidity segment is the portion of the payment that represents the period between when the person actually ceases employment and their retirement age.

Investment manager risk

The risk that a particular investment manager will underperform.

Investment sector

The major groupings into which investments can be placed. These groups have their own risk, return and liquidity characteristics.

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J

There are no Glossary terms starting with the letter 'J'

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K

There are no Glossary terms starting with the letter 'K'

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L

Large Cap stocks

Stock with a market capitalisation among the largest within a market. In Australia the largest 50 stocks on the market are generally classified as Large-Cap and in New Zealand the largest 20 stocks.

Legislative or regulatory risk

The risk that changes to legislation and regulations could reduce or eliminate the effectiveness of your investment strategy.

Level of risk

For each investment option offered through the Mercer Super Trust, the average expected likelihood of the option giving a negative return (in other words falling in value) has been included. In this context:

  • A 'high' level of risk means that a negative return is expected, on average, approximately one year in every three to five.
  • A 'moderately high' level of risk means that a negative return is expected, on average, approximately one year in every five to six.
  • A 'moderate' level of risk means that a negative return is expected, on average, approximately one year in every six to seven.
  • A 'moderately low' level of risk means that a negative return is expected, on average, less than approximately one year in every seven to nine.
  • A 'low' level of risk means that a negative return is expected on average, less than approximately one year in every nine.
  • A 'very low' level of risk means that a positive return is expected over rolling twelve month periods.


These statements are based on historical data and shouldn't be considered to be a guarantee or forecast that a negative return in one year will be followed by a positive return in the next year.

Levies

A charge applied in addition to tax. For example, Medicare Levy.

Life annuity

A product providing a set regular income stream, guaranteed for life.

Liquidity

The ability to easily turn assets into cash. An investor should be able to sell a liquid asset quickly with little effect on the price. Liquidity is a central objective of money market funds

Liquidity risk

The risk that you will be unable to redeem your investment at your chosen time.

Listed property

A collective investment vehicle which owns a portfolio of real property, thus providing for a wider spread of ownership. Listed property trusts are quoted on the stock exchange, and their prices fluctuate with supply and demand, as with equity investments. Unlisted property trusts are transacted directly with the trust's manager, who fixes the prices in relation to the established asset backing of the trust, with adjustments for expenses.

Loan to valuation ratio

Refers to the maximum amount lenders will approve against the value of any property taken as security for your home loan.

For example, if you wish to purchase a property worth $100,000 the lender may approve a loan for 80% of the property value. It will then be up to you to provide the remaining 20% plus costs (mortgage registration and stamp duty etc).

Long-term investment strategy

A strategy that looks past the day-to-day fluctuations of the share and bond markets and responds to fundamental changes in the financial markets or the economy. In investment terms, long-term generally means greater than five years.

Lost members/super

A person may become a 'lost member' when their superannuation provider loses contact with them or has not received a contribution or rollover from them for the previous two years. 'Lost' account balances are protected from erosion by administration fees if they are under $1,000.

Members can track their lost super through the Australian Taxation Office: ato.gov.au

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M

Managed fund

A diversified, professionally managed portfolio of securities that pools the assets of individuals and organisations to invest toward a common objective such as current income or long-term growth.

Manager risk

The risk that a particular fund manager will underperform.

Margin call

A demand from a broker or clearing house for additional funds to be deposited into a margin account to bring the account up to a required minimum level to cover an adverse movement in price in the futures market.

Margin lending or margin loan

A type of loan available from various financial institutions allowing investors to borrow cash against the value of listed shares or units in managed funds. Investors in margin lending schemes are typically required to maintain a predetermined minimum equity ratio within the loan, which varies depending on the exact security or combination of securities held. If the investor's equity falls below the agreed level as a result of adverse market movements, a margin call is made, requiring the investor to restore the loan to the minimum ratio.

Marginal tax rates

The rate at which income is taxed. Tax rates increase in a graduated scale, with the rate of income tax paid increasing as income exceeds certain amounts, called "brackets". More information can be found on the ATO website, www.ato.gov.au.

Market cycles

A business cycle concerned specifically with rises and falls in market activity, as measured by an index. Market cycles generally correspond to the economic clock, with periods of heavy purchasing indicating growth, and periods of heavy selling indicating recession.

Market risk

The risk that investments in a particular asset class will lose money based on the daily fluctuations of the market (ie through movements in currencies or interest rates).

Market timing

A (potentially dangerous) strategy of buying or selling securities in anticipation of changes in market or economic conditions.

Medicare Levy

An amount payable by most taxpayers to cover some of the cost of the public health system. Generally, the Medicare Levy is calculated as 2% of your taxable income (some exemptions exist).

An additional Medicare Levy Surcharge of up to 1.5% may be payable for high income earners that do not take out private health insurance for general hospital services.

Medicare Levy Surcharge

If a person's taxable income exceeds a certain level they may be subject to an additional Medicare Levy Surcharge of up to 1.5% for any portion of the year for which they (and their dependents) did not hold private patient hospital cover. This amount is in addition to the Medicare Levy of 2%.

The income thresholds for the Medicare Levy Surcharge from 1 July 2014 are:

  • Single person, no dependents - $90,000 p.a.
  • Single person with one dependent - $180,000 p.a.
  • Couple with 0-1 dependents - $180,000 p.a.
  • For each additional child after the first - $1,500 per child.
Mid Cap stocks

Stock with a middle ranking market capitalisation within a market. In Australia the stocks ranked in terms of size from 50 to 100 are generally classified as Mid Cap and in New Zealand from 20 to 50.

Mix of investments

Refers to the mix of asset classes allocated to an investment option. Each investment option has a potentially different mix according to its investment strategy and aims.

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N

Nikkei Dow index

A share price index covering the top 225 stocks listed on the Tokyo Stock Exchange.

Nominal return

Return on an investment before adjusting for inflation. For example, in a year where the investment return is 10% and inflation is 7%, the nominal return is 10% and the real return is 3%.

Non concessional contributions cap

Non-concessional contributions made to super are subject to annual contribution caps, set by the Government.

A cap of $180,000 a financial year applies on the amount of non-concessional contributions that a person can make to a superannuation fund without incurring additional tax.

 

Age at the start of the financial year in which contribution is made (1 July) Non-concessional cap 2016/17 Bring forward allowed? ($540,000)
64 or less $180,000 Yes
65 or more $180,000 No
 

To accommodate larger contributions, people under the age of 65 (at the start of the financial year) may bring forward two financial years' of non-concessional contributions - thus being able to make up to $540,000 of non-concessional contributions over 3 years. A person who makes a non-concessional contribution in excess of $180,000 in a financial year automatically triggers this bring forward provision.

Individuals who are aged 65 and older at the start of the financial year (1 July) will not be able to utilise this bring forward provision and therefore will only be able to make non-concessional contributions of up to $180,000 without incurring additional tax. Further, they must have been gainfully employed on at least a part-time basis in the financial year before they are able to make the contribution.

Non-concessional contributions in excess of the relevant cap are taxed at 49% (including the Medicare levy and the temporary budget repair levy). However a refund offer is now available. If the refund is accepted, the excess contributions will be returned and no penalty will apply to this amount. An additional amount of money will also be returned to account for estimated earnings on the excess. This amount will be added to an individual's assessable income for the year and is effectively taxed at your marginal tax rate.

Normal retirement age

The age, as designated by the Trust Deed, at which a retirement benefit is payable from a defined benefit fund. The most common NRA is 65. Some occupations, which demand a high level of physical and mental alertness, have a lower NRA (eg police, pilots, emergency service workers)

Notional taxed contribution

Employer contributions made into defined benefit funds are not always linked to individual members, they are paid into the fund and pooled to meet the costs of providing benefits for defined benefit members. For the purpose of tracking employer contributions for defined benefit members against the concessional contributions limit the Government has determined that a 'notional taxed contribution' should be calculated for defined benefit members.

The method for calculating 'notional taxed contributions' is set out in legislation.

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O

Option aims

Identifies the type of return the option aims to achieve for investors. This is often stated in relation to a relevant index such as CPI.

Ordinary time earnings (OTE)

The amount an employee earns for their ordinary hours of work. In general, OTE excludes any overtime paid. OTE is used as a default earnings base for calculating an employer's Superannuation Guarantee contributions if there is no other acceptable earnings base relevant for the employee. Since 1 July 2008, OTE has been the only allowable earnings base for calculating an employer's Superannuation Guarantee contributions.

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P

Percentile

A division used to value investment manager performance, by dividing them into 100 equal sub-groups ranked in descending order of importance. A manager ranked in the 10th percentile will have achieved results higher than 90 per cent of other managers.

Political risk

The risk that current domestic and international political stability may impact on investments.

Pooled Superannuation Trust (PST)

A trust in which assets of number of superannuation funds, approved deposit funds, or other PSTs are invested and managed by a professional manager.

Portfolio

A combination of securities. A fund's well-diversified portfolio lowers investment risk.

Power of attorney

A 'power of attorney' is a written document that allows you to authorise an individual or group of individuals to make financial decisions on your behalf if, for example, you are out of the country.

Preservation

Government legislation which restricts access to your super benefits until you retire permanently from the workforce after reaching preservation age or meeting other select criteria.

Preservation age

The age at which a member can access preserved benefits (generally age 55, under EISS rules), provided the member has permanently retired from the workforce (or met other select criteria).

From 1 July 2015, the government's schedule of preservation ages depends on the member's date of birth (as below).  If you take a cash benefit prior this age, you may pay more tax.

 

If you were born: Your preservation age is:
Before 1 July 1960 55
1 July 1960 - 30 June 1961 56
1 July 1961 - 30 June 1962 57
1 July 1962 - 30 June 1963 58
1 July 1963 - 30 June 1964 59
After 30 June 1964 60

 

Preserved amount

That part of a member's benefit which is subject to preservation.

Preserved benefit

A superannuation benefit which cannot be cashed by an employee until the employee has met a condition of release.

Price to earnings ratio (P/E ratio)

A method of valuing stocks, calculated by dividing the closing price of a company's stock by its annual earnings per share. Growth stocks tend to have a high P/E ratios compared to income stocks.

Private sector

That part of the economy owned by private individuals, companies or organisations.

Product disclosure statement

A legal document describing the features of a product, together with a summary of the significant benefits, potential risks and the costs associated with that product.

Profit taking

Selling securities after they have risen in value to realise a gain.

Property

Investing directly in office buildings, shopping centres, industrial estates and other similar property investments is known as direct property investment. Investors can also buy units in property trusts, which invest in a variety of properties. These trusts may be listed on the Australian Stock Exchange or they may be unlisted.

Property investment is suitable for long-term investment as it has the expectation of some ups and downs in the short-term.

Prospective normal retirement benefit (PNRB)

The superannuation benefit a person would have received from a defined benefit fund at their normal retirement age (without injury/death), assuming their current salary would have continued unchanged to that time.

Public sector

That part of the economy with public (Government) ownership.

Purchasing power

A measure of money's value in terms of what it can buy. Purchasing power is affected over time by inflation. Also called "buying power.

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Q

Quartile

A division used to value investment manager performance, by dividing them into four equal sub-groups (ranked in descending order of importance). The top 25% in terms of performance are said to be in the first quartile having achieved returns 75% or higher of those managers in the second, third or fourth quartiles.

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R

Real rate of return

The return on an investment after it is adjusted for the effects of inflation.

Redemption

The process of converting shares into cash. Any open-end managed fund must redeem shares at the current price from a registered shareholder upon request.

Reportable fringe benefits

Employers are required to record the taxable value of certain fringe benefits provided to employees. Where the total taxable value of those fringe benefits exceeds $1,000 in a fringe benefits tax (FBT) year (1 April to 31 March), employers are required to report an amount on the employee's payment summary.

Residual Capital Value (RCV)

The lump sum benefit payable at the end of the annuity contract or upon death of the annuitant.

Restricted non-preserved benefit

The part of a superannuation benefit, which in the case of an employee, can be paid in cash directly to the member on termination of employment. It can also be paid out at the same time as the preserved benefit.

Retirement income amount

A retirement income account is an arrangement where a person has an account in a superannuation fund and draws a regular income, e.g. monthly, from this account. The person can decide how much income to take each year as long as it falls within levels set by the government.

Lump sum amounts can be withdrawn from a retirement income account, but if taken prior to age 60, lump sum tax may be payable on any amounts withdrawn.

The retirement income account will move up and down in value depending on the investments that are chosen and movement in the investment markets.

The retirement income will continue until the money in the account is exhausted or the person dies. Any remaining amount in the account upon the person's death is usually paid to an eligible beneficiary as a lump sum. Alternatively the retirement income may continue to be paid to a dependent - such as a spouse.

Reversionary beneficiary

The person to whom a retirement income or annuity continues to be paid after the death of the original recipient.

Risk

In its simplest sense, risk is the variability of returns. Investments with greater inherent risk must promise higher expected yields if investors are to be attracted to them. Risk can take many forms (see the below links for more detail on the different types of risk).

Rollover

The transfer of a Superannuation Benefit from one superannuation fund, rollover fund or Retirement Savings Account to another.

Rollover fund

This type of fund can accept and invest accumulated superannuation and specific payments from employers (ETPs). It includes Approved Deposit Funds (ADFs), Deferred Annuities (DAs), Immediate Annuities and superannuation funds.

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S

Salary continuance insurance

Insurance on your income, to ensure you're paid a percentage of your salary if you stop work due to a temporary disability or illness for a set period of time.

Salary sacrifice

Salary sacrifice is a facility whereby an employee forgoes some of their before-tax salary in exchange for other benefits. For superannuation purposes, it refers to arranging for your employer to put part of your before-tax salary into your super fund as superannuation contributions. This means the employee receives a lower level of salary and the employer contributes the 'sacrificed' amount to a superannuation fund for the benefit of the employee.

Sector specialist investment approach

Specialist managers are appointed to manage assets in each asset class or sector within the option.

Sectors

A group of securities that share common characteristics. For example, resources sector, textiles sector, etc.

Shares

Also known as equities or stocks, shares are issued by companies as a way to raise money. In return, investors become part owners of the company and are generally entitled to a portion of the profits.

Investment returns will depend on how the company performs over time and on economic factors.

Australian shares give you a stake in companies listed on the Australian Stock Exchange, mainly from Australia.

Overseas shares are investments in overseas companies listed on overseas stock exchanges. Overseas shares invest in different economies, which may assist in reducing overall volatility (ups and downs in returns) by increased diversification. Overseas share investments are also subject to currency movements which can add to, or take away from, the share market return.

Shares are classified as a growth investment. Over the long-term, returns from shares have in the past tended to be higher than those achieved by property, fixed interest and cash. However, in the short term, performance tends to have more ups and downs.

Small Cap stocks

Stock with a market capitalisation of among the smallest within a market. In Australia, stocks outside the Top 100 by size are generally regarded as Small Cap and in New Zealand the stocks outside the Top 50.

Socially responsible investment (SRI)

Involves making an investment decision based on principles of social responsibility in addition to the usual investment criteria.

SRI considerations can include labour standards, environmental issues and social and ethical issues.

Spouse (for eligible spouse contributions)

For superannuation purposes, a spouse from 1 July 2008 includes:

  • Married persons; This includes persons of the opposite sex who are married
  • Persons who are in a registered relationship; This includes persons who are not married but have registered their relationship. Currently Victoria (Relationships Act 2008), Tasmania (Relationships Act 2003) and the ACT (Civil Partnerships Act 2008) have prescribed legislation for registering relationships.
  • De facto relationships - persons who, although not legally married, live together on a genuine domestic basis in a relationship as a couple. This includes persons who are living together as a couple and are of the same sex (even if they have not registered their relationship); and persons of the opposite sex who have not married.
Spouse contribution

Contributions made to a superannuation fund on behalf of a spouse. A tax offset is available for contributions made for spouses - conditions apply.

Spread (Buy-Sell Spread)

This is a fee to recover transaction costs incurred by the trustee in relation to the sale and purchase of assets (for example shares).

Standard deviation

It shows the average difference between a portfolio's periodic returns and a benchmark index. The smaller the difference, the lower the standard deviation will be and the greater the degree of stability you can expect from the fund.

Superannuation benefit

A payment from a superannuation fund, Retirement Savings Aaccount (RSA) or Approved Deposit Fund (ADF).

Superannuation Complaints Tribunal (SCT)

An independent tribunal established by the Federal Government to deal with certain complaints concerning decisions of super fund trustees. The Tribunal requires complaints to be fully addressed through the fund's internal dispute resolution procedure before it can consider a complaint.

For more information, visit the Superannuation Complaint Tribunal's website: sct.gov.au

Superannuation contributions splitting

Super contributions splitting allows a member of a superannuation fund to split certain super contributions made after 1 January 2006 with their spouse.

The scheme is voluntary and trustees of super funds do not have to offer the facility.

Contributions splitting is available in respect of contributions made by or for:

  • accumulation members, and
  • defined benefit members - but only in relation to contributions to any additional accumulation account - splitting is not available in relation to contributions funding the defined benefit component of their benefit.


Specific conditions have to be met before a super contributions split can be effected.

Superannuation death benefit

A payment from a super fund, Retirement Savings Account or Approved Deposit Fund because of the death of the member.

Superannuation Guarantee (SG)

Employers in Australia are required by the Superannuation Guarantee (SG) legislation to make contributions to a complying superannuation fund for most employees.

The minimum contribution under the Superannuation Guarantee is 9.5% of an employee's ordinary time earnings.

SG contributions are not required for employees who:

  • Earn less than $450 per month, or
  • Are under age 18 and working 30 hours or less per week.
  • Non residents being paid for work outside Australia
  • Some foreign executives who hold certain visas or entry permits under the migration regulations
  • Temporary workers in Australia, covered by bilateral superannuation agreements with another country
  • People paid to do work of a domestic nature for no more than 30 hours per week
  • Members of the army, navy or air force reserve
  • Employees receiving salary and wages under the Community Development Employment Program
     
Superannuation income stream

A regular series of payments from a superannuation fund to an individual who qualifies under certain conditions.

Superannuation interest

An interest, such as a benefit, that a person has in a superannuation fund.

Switching fee

A fee that a fund may charge when you change investment options.

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T

Tax free component

That part of the superannuation benefit which is not subject to tax and is not added to assessable income.

The tax free component comprises:

  • the pre-July 83 component
  • the CGT exempt component
  • the post-June 1994 invalidity component
  • the non-concessional component that existed on 30 June 2007, plus
  • the non-concessional (post-tax) contributions made from 1 July 2007.


Contact your superannuation fund member helpline to obtain the tax free portion of your superannuation benefit item.

Tax year

For an individual, the period between 1st July of one year and 30th June of the following year. Also known as a 'financial year'.

Taxable component

That part of the superannuation benefit which is subject to tax.

The taxable component is the superannuation benefit less the tax free component.

For individuals 60 years and older it is paid tax free (if paid from a taxed fund).

For individuals between their preservation age and age 59, it will be paid tax free up to the low-rate threshold ($195,000 in 2016/17) and amounts above the threshold will be taxed at 15% (plus the Medicare levy).

The tax rate will be 20% (plus the Medicare levy) for individuals aged under their preservation age.

Taxable income

Assessable income less any tax deductions. This is the amount of income which tax is calculated on.

Term allocated pension

A Term Allocated Pension has some features of an allocated pension and some features of a term annuity. However the key point is that it is a complying income stream, and therefore qualifies for the 50% assets test exemption for social security if commenced prior to 20 September 2007.

Like an allocated pension, a Term Allocated Pension has an account balance that is invested in your chosen investment strategy, and any money remaining on death would be paid to your estate.

Like an annuity there is no access to your capital, and the income is fixed each year. The income is recalculated each year and depends on the account balance at the time and the remaining term, so unlike an annuity the income level is not guaranteed.

Term certain annuity

A type of annuity contract where the term of the contract is set for a specified period. For example, if the annuity is for five years, then the payments will continue for five years.

Timing risk

The risk that, at the date of the investment, money is invested at higher market prices than those available soon thereafter. Alternatively, it can also mean the risk that, at the date of redemption, the investments are redeemed at lower market prices than those that were recently available or that would have been available soon thereafter.

Top-down approach

An approach to investing in which the investor first looks at general trends in the economy and then chooses specific industries and particular companies that will benefit from these broad trends.

Trust deed

The legal document setting out the rules for the establishment and operation of a super fund.

Trustee

The persons or corporate body legally appointed to run a super fund in accordance with the requirements of the fund's governing document (otherwise known as the trust deed). The trustee of a super fund must comply with certain legislative duties and has a fiduciary duty to the members of the fund.

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U

Unclaimed money

Money in a member's super account is defined as unclaimed when the person has reached the age when he/she would be eligible for an age pension but the person has not applied for their superannuation benefit and the trustee has not been able to locate the person in the last 5 years. Unclaimed money must be paid to the ATO. The person can then claim their benefit from the ATO.

Unit price

A unit price is equal to the value of the underlying assets of an investment option divided by the number of units issued. Unit prices move up and down each day in line with the movement in the value of the underlying assets. As such, investment earnings (positive or negative) are reflected in the movement of unit prices.

Units

The assets of each investment option are divided into units of equal value.

Unrestricted non-preserved benefit

Superannuation benefits to which no payment restrictions apply. They can be paid to a member at any time provided the fund's rules allow payment.

Untaxed element

The portion of the Post June 83 component of an Eligible Termination Payment (ETP) that has been funded from an untaxed source (such as an unfunded superannuation scheme).

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V

Value investing

Super is generally preserved in a super fund until an individual retires permanently from the workforce on or after their preservation age. However, super fund trustees may allow the early release of preserved super benefits under certain circumstances, e.g. if the individual is suffering severe financial hardship or on specified compassionate grounds.

To apply for financial hardship you must apply to the trustee of your super fund, as special conditions must be met.

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W

Will

A Will is a legal document in which the person who has made the Will (known as the Testator or Testatrix) sets out who will receive his/her assets. In other words, it's just one vehicle through which your assets can be dealt with in the event of your death.

Wrap account

A wrap account is an administration service that allows you to combine your portfolio of managed funds and/or direct investments (e.g. shares) under one administrative umbrella.

You can generally choose from an extensive menu of investments provided by various investment managers and receive consolidated transaction and valuation reporting provided by the wrap's provider.

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X

There are no Glossary items for the letter 'X'

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Y

Yield

The rate at which a security distributes income, expressed as a percentage of the current price. For example, if a fund distributes $1 per share over the year and at the end of the year the price is $20, its yield is $1/$20, or 5%. Yield is an important measure of performance for income funds and individual bonds.

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Z

There are no Glossary items for the letter 'Z'

 

Electricity Industry Superannuation Board ABN 57 923 283 236 as Trustee of the Electricity Industry Superannuation Scheme.

This website is provided by Mercer Outsourcing (Australia) Pty Ltd (MOAPL) ABN 83 068 908 912, Australian Financial Services Licence #411980. The Trustee pays a fee for the provision of this service, however this fee is not conditional on you using this service or acting on the information or advice provided through this service. 'MERCER' is a registered trademark of Mercer (Australia) Pty Ltd ABN 32 005 315 917. Copyright 2016 Mercer LLC. All rights reserved.