What Is Superannuation (Super) In Australia: Explained

With an investment of AU$ 3.5 trillion in superannuation assets, Australia is the 4th largest holder of pension fund assets worldwide. 

Superannuation or Super is a Government initiative that aims to create an environment where people can put money aside to receive a better income in retirement.

Under this scheme, your employer pays a percentage of your earnings into your super account, which super fund invests in different investment options till you retire. The scheme helps grow your investment value to meet your future financial needs.

This guide discusses the concept of superannuation in Australia and the types and categories of super funds. It compares them to help you find the right fund for your needs.

1. What Is Superannuation In Australia?

Superannuation is money set aside during working life that you can use as an income when you retire. In other words, the money saved in super funds secures your financial future. The more money you put in your superannuation fund, the more will be your retirement savings.

Superannuation is mandatory for all people who work and reside in Australia. Federal law has made it compulsory for employers to contribute at least 10.5% of employees’ earnings to their super accounts on top of their standard wages.

However, if you run a business, you can set up a super fund and put money into it regularly. Your accumulated savings are withdrawable upon retirement.

2. What Is A Superannuation Fund?

In Australia, the term “Superannuation” implies retirement pension benefit funds. Most working Australians put a certain percentage of their salary into these funds, and employers make similar contributions regularly.

Working Australians usually deposit their salary deductions into self-managed superannuation funds when most employees contribute to industry or retail funds.

Currently, four regulatory bodies supervise superannuation funds to ensure they comply with the legislation:

• The Australian Prudential Regulation Authority (APRA)

• The Australian Securities and Investments Commission (ASIC)

• The Australian Taxation Office (ATO)

• The Superannuation Complaints Tribunal (SCT)

• The Australian Financial Complaints Authority (AFCA)

3. Why Is Superannuation Important?

The benefit of superannuation is that it secures the financial future of the Australian working population. As your super balance grows with investment returns, you can meet your financial needs and lead an independent and happy retirement life.

This retirement income helps you supplement your Australian Age Pension and make a shift from earning a regular salary into a retirement pension. So, when you retire and no longer earn an income, you can access your superannuation rather than simply depending on the age pension to support your living.

Your super account comes with different types of insurance coverage. These include Death benefits and Total and Permanent Disablement Income Protection, covering you against losses when you cannot work due to illness or injury.

For example, most super accounts allow account holders to use some of their super balance to pay for life insurance. It protects their finances if they fail to work due to an injury or illness.

Super is a great way to save money for their retirement. Since it lowers the government’s future pension costs, tax incentives may apply to your Superannuation Guarantee and other contributions. By bundling Insurance products into your superannuation, you can reduce your tax liability to some extent.

4. How Does Superannuation Work In Australia?

To reap the benefits of superannuation or the Australian Age Pension benefit, you must first understand how super works. Both employed and self-employed people can use Superannuation benefits.

For Employees:

If you are 18 years or older and meet the superannuation guarantee requirements, your employer must pay at least 10% of your ordinary time earnings into your super fund. Additionally, you can also start contributing to your super account.

This payment is over and above your annual salary and is payable whether you work casually, full-time, part-time, or as a contractor.

You can tell your employer about your preferred super fund so that employer will make super payments into that fund.

Suppose you don’t nominate a preferred fund and haven’t received super before. In that case, your employer will set up a default account on your behalf with its super default fund and make super contributions to that account.

For Self-Employed:

If you are self-employed, you can decide the amount of your income you want to set aside for superannuation.

Here comes the question, what is the superannuation benefit in Australia? All the contributions that you or your employer make into your super fund get added up throughout your work life. This way, your savings grows, and you retire with a larger corpus.

As you near your retirement age, you can move from your super account into a Choice Income account to get a regular income stream in retirement.

5. How Is Super Invested?

Your super fund invests in various assets to grow your super balance. Some of these assets include:

• International shares

• Australian listed shares 

• Cash

• Australian fixed-interest schemes 

• International fixed interest schemes 

• Infrastructure

• Hedge funds

• listed and unlisted property

• Unlisted equity and other assets

The savings in your super account grow as per the performance of your chosen investment option. Your super provider invests money on your behalf to provide you with the best return on investment to have a nice super balanced when you retire.

You can let your super fund manage your investments or choose your options. Also, you can invest your super differently at different stages of life or based on your risk estimates or other relevant factors.

For example, when you join Australia’s largest super fund, Australian Super, your investment choice will be set as the “Balanced option” by default. However, you can change your investment option based on your personal needs and requirements. 

The fund offers different investment options for its members based on the extent they want to be involved in managing their investments. 

Considering your risk appetite and other factors such as market volatility, inflation, interest rates, liquidity, and credit, it is the most suitable range of investment options.

6. What Is The Superannuation Amount In Australia?

Superannuation is the fund or “pension benefit” an employee receives from the employer on retirement.

The employer contributes a set percentage of money based on the employee’s age, earnings, and other factors. After retirement, the employee can redeem this amount for his benefit.

7. What Is The Superannuation Guarantee Percentage?

Work for an organization or a company. Your employer should compulsorily pay money into a super account in your name. This guaranteed payment by the employer to the employee’s super fund is called Superannuation Guarantee.

The Australian Government Taxation Office decides the minimum percentage of employees’ earnings paid into their super account, including commissions, bonuses, and loadings. Currently, the current Super Guarantee Percentage (SGP) is 10.5%.

However, employees can make voluntary contributions, such as diverting a portion of their income into superannuation contributions to have even more to live off at retirement.

Here are the projected SGP for the coming years:

8. Does Everyone Get Superannuation In Australia?

To be eligible to receive Super Guarantee, you need to fulfil some criteria:

1. PAYG

Your employer will put at least 10.5% of your earnings into your super fund if:

• You are over 18 years of age.

• You are under 18 years and work at least 30 hours a week working full-time, part-time, or casually. For more information, refer to the ATO.

2. Sole Trader or In A Partnership

You are not obligated to make Super Guarantee contributions. However, you can make them voluntarily as a form of retirement savings or opt for government benefits to save for your retirement.

9. When Can I Make Superannuation Withdrawal?

To help employees save adequate money for their old age, the government has placed restrictions on when you can access your superannuation savings.

According to Schedule 1 of the Superannuation Industry (Supervision) Regulations 1994, a person can withdraw funds out of a superannuation fund when you reach retirement age:

• If you are 65 years or above and still working 

• If you reach preservation age (based on your birth date) and retire 

• If you are between your access age and 65 and working, you may access a portion of your super balance with a switch to a retirement account type.

Early access to some amount of super is available in the following scenarios:

• When having a terminal medical condition or is permanently disabled. (Your withdrawn amount will be taxed as a super lump sum. The minimum and maximum withdrawable amounts are $1,000 and $10,000. If your super balance is below $1,000, you can withdraw your super balance after tax deduction.

• Moving to another country

• Facing severe financial hardship

• On compassionate grounds 

As of 1 July 2018, super account holders can withdraw their voluntary contributions as part of the First Home Super Saver Scheme. The withdrawal limit ranges from $15,000 to $30,000 across all years. 

However, members must meet the eligibility criteria to apply for the release of the funds.

10. Types Of Superannuation In Australia

While saving for retirement, it is essential to understand where your super contributions are going and the benefit you will receive when you stop working.

Your actual retirement benefit depends on several factors, such as:

• Total contribution amount

• Performance of investment markets

• The investment option you opted for

• Extra contributions made by your employer on your behalf

There are mainly two main types of superannuation funds to choose from. As super represents the bulk of retirement savings, choosing them should be well-researched before your final decision. Let us look at each of these funds below:

Accumulation Funds

As the name suggests, the fund 'accumulates' or grows your money over time. The value of the super you receive depends on the contributions you and your employer have made and on the return on investment generated by the fund after deducting fees and costs. 

Final super benefit on withdrawal = Employer contributions + Employee contributions + investment earnings – fees and taxes.

The investment return depends on how your super fund invests those savings. Most retail and industry super funds are of this type and available to the public or employees when they start working in a company. 

The downside of choosing this fund is that your super balance depends on the performance of the investment markets. This investment option carries a risk. Your super at your retirement could decline, or your investment gains can be negative if there is a crash in investment markets.

Defined Benefit Funds

It is a traditional fund where your retirement benefit is calculated based on a formula rather than on investment return. In many ways, these funds offer a much better deal than modern accumulation funds. Most super funds of this type are public sector funds or corporate funds.

Examples of defined benefit super funds are:

• Australia Post Super Scheme

• TelstraSuper

• Westpac Group Plan (Defined Benefit)

• Qantas Super

• The Commonwealth Superannuation Scheme fund

• Public Sector Superannuation Scheme

• The WA-based Gold State Super

• West State Super

• Military Superannuation and Benefits Scheme

Let us understand what is the defined benefit super in detail. The fund pays a fixed retirement benefit to its members by calculating using the:

• Total contributions you and your employer have made

• Your average salary earned over the last few years before retirement

• Your work tenure with the employer

Final super benefit on withdrawal = final average salary x Years of service.

In these funds, employer contributions go not into individual member accounts but into a defined benefit pool from which members receive the benefits.

What you receive on retirement depends on your defined benefit super fund's rules (trust deed). Also, your super fund or employer takes the investment risk when the investment markets decline. 

In that case, the super fund or your employer is responsible for topping up the amount you receive to ensure your retirement benefit remains the same as specified by the fund's rules. 

11. What Are The Different Categories Of Super Funds?

When looking at the vast range of super funds, one needs clarification about which to select. Understanding individual super funds and how they differ from other funds will help you simplify your selection process.

• Industry Super Funds These funds were initially available for workers working in a specific industry across multiple work sites but are now open to everyone. 

• It comes with limited and pre-mixed investment options (ETFs, shares, and term deposits) to meet most people's needs.

• Unlike retail funds, these funds are low-cost and not-for-profit funds that return profits to their members in better products and services instead of dividends to shareholders.

• These funds have a history of above-average returns on investments.

• In comparison to retail funds, the fee charged by these funds is lower.

• Most industry funds offer accumulation and pension funds. 

Self-Managed Superannuation Funds

• The Australian Taxation Office regulates only SMSFs. The Australian Prudential Regulation Authority regulates all other super funds categories Australian Prudential Regulation Authority regulates all different super fund categories.

• It is a super private fund that gives members greater control over their funds and lets them manage them themselves.

• In this fund, you choose your investment options and insurance.

• Choosing to self-manage your fund may look appealing, but it may take a lot of time and commitment and comes with risks.

• It is ideal for DIY investors who seek more flexibility or control and can run their super fund. 

• Your SMSF can have a maximum of 6 members. Being a member, you are the fund's trustee (or a director if there is a corporate trustee) and responsible for all investment decisions and compliance.

• Though there is a nil minimum investment, the cost of account creation and yearly running expenses can be high if you use admin and other services.

• Consider it only if you are fully committed and understand what is involved. 

Retail Fund

• These funds are owned and managed by investment companies and financial institutions like banks that are publicly listed on the stock market and have shareholders.

• These are usually accumulation funds and are open to every investor.

• The company that runs the fund retains a certain percentage of the profit.

• Retail funds are run for profit and help members save for retirement and earn a profit through dividends.

• Financial planners generally offer this fund via an administrative platform and give access to a broad array of investments. In turn, they charge mid to high-cost fees, such as platform fees and advice fees. 

Corporate Funds

• Big Australian companies like Qantas and Telstra set up these funds for their employees.

• Large corporates usually appoint a board of trustees to supervise the investment of the super funds of the workforce. Smaller corporate funds may work under a large industry or retail super fund. 

Public Sector Funds

• These funds run mainly for federal and state government employees that receive higher super contributions.

• These are not-for-profit funds and are open to anyone.

• Public sector funds generally provide limited investment options that include MySuper, a scheme by the Australian government where employees get effective and low-fee super funds. 

• These funds come under a member-first profit model, low charge fees, offer good member services, and contribute more than the minimum 10.5% of the Superannuation Guarantee. 

• Older members are in defined benefit products, and newer members are in the accumulation funds.

Student Super

It is the 1st superannuation fund built to meet the specific needs of students and young professionals who work part-time or casually while studying in Australia.

The fund charges $0 fees for super balances below $1000 and offers fee discounts for balances below $5,000.

12. What Is Superannuation In Salary and Who Pays Superannuation?

As per the law, if you are above 18 years old and working over 30 hours a week, your employer must pay 10.5% of your "Ordinary Time Salary" or OTS into your super fund.

OTS implies what you usually earn for ordinary work hours, such as bonuses, allowances, paid leave, and over-award payments but excludes overtime salary.

Employees and sometimes the Australian government also adds money into their super savings. All employees, whether they are working full-time, part-time, or on a casual basis, are covered by the superannuation guarantee.

Your employer has to contribute at least four times a year (or more often if required). You can keep track of the Super Guarantee contributions by checking your super account transactions or accessing the myGov site regularly.

Employees who wish to save more money in their super account, and pay less tax, can make voluntary contributions to add additional money to their super account. Giving their Tax File Number to a super fund can help them make other contributions and avoid paying additional taxes.

Employees can always choose or change super funds; however, their employer must act on their choice once a year.

Suppose the employee doesn't make a super choice. In that case, the employer will make "default contributions" into an authorized MySuper superannuation fund. 

It is a simple, low-cost, single-balanced investment with a few standardized fees.

13. How Do I Log In To Check My Super Balance?

Follow the below steps to check your super balance: 

• Step 1: Click here to register on your Australian Retirement Trust account

• Step 2: Log in to your online Australian Retirement Trust account 

14. What To Consider When Choosing A Fund?

The super fund selection is among the most crucial financial decisions you make during your working life. It is about carefully evaluating available options to find the right super fund that meets your retirement goals.

Whether you are an employee receiving mandatory Superannuation Guarantee payments from your employer or are self-employed, the super fund selection deserves careful consideration.

If you work for something other than public services or a big company that provides its super fund, you must decide between an industry or a retail fund. Having decided on the super fund, you want to go for, consider a few more things:

• Look at the fund's performance and how much money it has made for its members. As super is a long-term investment, check the fund's long-term investment returns (10 years or more) to get an overview of past returns.

This analysis will give you an idea of what you can expect to make by parking your money in this fund for a longer term.

• Another important consideration is to learn about what services it offers to members. Some funds have financial planning/advice services and insurance coverage.

• You must pay attention to the fees and costs associated with investing in a super fund. The key is to find a low-cost, low-fee, and high-performance fund so that you don't lose your hard-earned money in paying fees and get better returns on your savings.

• Avoid having multiple super accounts, as it will take away a chunk of your super balance in the form of account creation and fund management fees. Such expenses may look smaller initially but could impact your super balance at retirement.

• Voluntary contributions, investment strategies, roll-overs, and periodic evaluation of the fund's performance are some ways that will help your super grow for retirement.

• Additionally, you can buy certain insurance products through your superannuation fund than through insurers. It can help you save on insurance agent fees.

• If you already have multiple superannuation accounts, consolidate them into a lower-fee fund to save on costs and paperwork.

15. How To Know How Much Super I Will Need When I Retire?

The Association of Superannuation Funds has a Retirement Standard that can estimate how much you need for retirement based on your age, marital status, and expected living style.

This Superannuation calculator in Australia determines how much super balance you will have when you retire and how the super fund fees impact your final super balance.

To use this tool, users will need to input a few details:

• Your current age (min: 18, max: 75)

• Salary: ($ p.a., before tax and super, max: $1,000,000)

• Desired age of retirement: (min: 60, max: 75)

• Super balance(s): ($) (max: $5,000,000)

• Employer Guarantee contribution: (%) (min: 10.5%, max: 25%)

• Any additional contributions? (Yes/No)

• Fund fees: Fee level (Default/Other), Contribution fee: (%) (max: 10%), and Admin fees: ($ p.a.) (max: $1,000)

• Investment option (Default/Other)

• Investment return: (% p.a.) (max: 20%) 

• Tax on earnings: (% p.a.) (max: 15%)

• Investment fees: (% p.a.) (max: 5%)

Alternatively, you can also try the retirement needs calculator to determine how much super balance you will need.

16. How Do I Keep Track Of My Super Savings?

Super balance is your money. Keep an eye on your superannuation balance and payments to ensure your money works hard to give you a comfortable retirement.

Providing your Tax File Number to your super fund makes it easier to track your super, switch between super accounts, and receive super payments from the government and your employer.

Here are the steps to track your super balance:

• Create an account on the myGov website

• Link your account to the Australian Taxation Office to see all your super account details. With the "YourSuper comparison tool", you can also compare the fees and performance of your super accounts against other super products. Additionally, you can consolidate multiple super accounts into one account by shifting your super balance into your chosen super account. 

17. How To Find Your Lost Super?

The ATO or your super fund may have it if you have lost super. You can find it online through the ATO:

• Create an account on the myGov site

• Link this account with the ATO.

• Select 'Super'

Doing this, you will see details of all your existing, lost, or forgotten super accounts. You can easily find any of your super accounts held by ATO, which happens when your super fund, the government, or your employer can't find an account to deposit your super into

Alternatively, you can also find your lost super on the ATO website.

18. What Is Superannuation Tax?

Your super balance is affected by fees, insurance, and tax. The government taxes the contributions from your employer into your super account at 15%. Your tax liability on your super contributions and withdrawals is dependent on the following:

• Your age

• Your super balance

• The type of withdrawal or contribution you make

• If you inherit the super balance of a deceased, then that super fund gives you a "super death benefit". You may be entitled to pay a certain amount of tax on this benefit that depends on the following:

- The taxable and tax-free components of the super

- Whether you withdraw the death benefit as a regular income stream or a lump sum

- Whether you are a dependent for tax purposes

19. How Are Super Contributions Taxed?

Earnings on contributions in your super fund, including interest and dividends, are taxed at 15%. However, there are a few exceptions to this rule:

• Suppose your super contribution is $37,000 or less. In that case, the tax deducted is reversed and paid back into your super account via the low-income super tax offset.

• If your super contributions and income are over $250,000, then you pay Division 293 tax.

• If you make voluntary contributions from your "after-tax income", you don't need not pay any contributions tax.

20. How Are Super Withdrawals Taxed?

The amount of tax payable depends on the mode of Super withdrawal you choose, such as:

A Lump Sum Payment:

• If you are 60 years or above, you don't pay tax if you withdraw from a taxed super fund. You may need to pay tax when withdrawing from an untaxed super fund, like a public sector fund.

• If you are below 60 years, no tax is payable if you withdraw up to the 'low-rate threshold', $225,000. Else, you pay a marginal tax rate or 17% tax, whichever is lower.

• If you have yet to reach your preservation age, you need to pay 22% tax or your marginal tax rate, whichever is lower.

Small regular payments over a long period. You pay no tax if you are aged 60 or over.

Refer to the super lump sum tax table on the ATO website for more details.

21. Top Superannuation Providers In Australia

Your super balance depends on the performance of the super fund that manages it. A thoughtful comparison between different funds is essential to find the right fund that meets your needs.

Here are our top 5 picks based on past performance, fees charged, investment options and strategies, and features like members' insurance:

22. Conclusion

Super is a great way to save money for a comfortable and secure financial future. 

This blog has given you a basic understanding of superannuation, its importance, and how to choose the right fund to get the best future investment value.

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